Can Regional Data Be Used to Determine Reasonable Compensation Anywhere?
If you’re valuing small private companies, then you know that one of the biggest adjustments to be made is for reasonable compensation. But getting good, supportable data is often a challenge—and expensive. Therefore, consider a regional survey, which could give you the data you need at an affordable price.
In their book, Reasonable Compensation: Application and Analysis for Appraisal, Tax and Management Purposes, Ron Seigneur, ASA, CPA/ABV/CFF, CVA, and Kevin Yeanoplos, CPA/ ABV/CFF, ASA, devote a chapter to sources of data. When discussing the northwest Executive Compensation survey, the authors write: “We haven’t seen any compensation survey with this much detail.” Also, unlike many compensation surveys that cost in the thousands of dollars, this one sells for $595.
Milliman, founded in 1947, is an executive compensation consulting firm based in Seattle. With nearly $1 billion in annual revenues, the firm is also known for its actuarial and employee benefits expertise. The 2013-2014 Milliman NW Executive Compensation survey, the company’s 29th edition, covers 288 companies in Oregon, Washington, and Idaho. There are data on CEOs as well as 18 other job titles, categorized by company size and industry. Since Milliman does about 20 other executive surveys on a variety of topics, “they have an inside track with companies, many of whom are reluctant to provide compensation data,” says Larry Daniels, senior compensation consultant with Milliman.
The following are some of the executive positions that are surveyed and tabulated:
- Chief executive officer;
- Chief financial officer;
- Chief information officer;
- Top marketing executive;
- Top sales executive;
- Top manufacturing executive;
- Top HR executive; and
- General counsel.
Using the survey
For business appraisers in the Pacific Northwest, of course, the data are attractive because they are region-specific. Recently, I was asked to value a real estate investment company in Portland, Ore. Since no industry category lined up with it, I chose to use the composite of privately held companies in the $0-to-$30 million range. I saw that the 50th percentile compensation was $168,000, significantly lower than my subject. I also looked at the list of company perks listed on page 62 of the survey and determined that my subject company CEO enjoyed a wider array of perks. Based on these data and other subjective factors, I reduced the compensation of my subject by about $80,000, which added another $400,000 to its value.
But where does that leave appraisers in other regions? Daniels argues that other factors weigh much more heavily than geography. “We think executive compensation is a national market,” he says. “The variation is more about industry and size of company.”
For example, on page 12 of the survey, median privately held CEO cash compensation for companies in the $0-to-$30 million category is $168,600 (see the exhibit). Now look at companies in the $250 million-to-$1 billion range, and you’ll see that compensation more than doubles to nearly $445,000. Daniels believes that regional differences would not be nearly as wide. In reality, an executive in Portland would probably not need a cost-of-living adjustment to live in most cities in the U .S., with notable exceptions including Los Angeles, San Francisco, Boston, and New York City.
Many online calculators can convert costs from one city to another. For example, a calculator on CNN’s website (money.cnn .com/calculator/pf/ cost-of-living) indicates that a person earning $200,000 per year in Portland would need to earn about $379,000 in Manhattan, N .Y., to have an equal standard of living. Salary differential studies can also be used for adjustments, such as the U.S. Geographic Salary Differential study from Mercer (imercer.com).
The problem with calculators and average adjustments is that they sometimes defy common sense. A person earning $200,000 in Portland can probably afford to buy a four-bedroom house in the best part of town. A person earning $379,000 probably can’t afford to live in Manhattan, certainly not at the same standard of living.
As a result, while it may not be best to try to adapt regional data such as Milliman to one of America’s big expensive cities, it’s probably not necessary to adjust it for any place else.
Both the Milliman NW Executive Compensation survey and Reasonable Compensation: Application and Analysis are available at www.bvresources.com/compensation.