Director remuneration and market terms

Owner-managers set their own pay

In a company where the director is also the main or sole shareholder, remuneration is not the outcome of an arm's length negotiation between employer and employee. It reflects a personal choice, often influenced by tax planning, cash flow needs, or historical practice, rather than what the role would command on the open market.

This matters for a valuation, because remuneration is a cost that directly reduces reported earnings. If that cost does not reflect what a comparable, unrelated manager would be paid for running the business, then reported earnings do not reflect what the business would actually cost to operate under normal management.

Both directions of departure are relevant

A director may draw remuneration well above what the role would justify, for instance to extract profits in a tax-efficient form, which understates the company's true earning capacity. Conversely, a director may take a modest salary and rely on dividends or other benefits, which can overstate reported operating costs relative to what a hired manager would actually cost.

A valuation report considers both possibilities and, where the departure from market terms is material, adjusts the earnings base to what a market-consistent remuneration would imply, rather than assuming the reported figure is automatically representative.

Establishing what market terms look like

Determining a market-consistent remuneration level requires reference points such as the size of the company, the sector, the scope of the director's responsibilities and comparable data where available. This is a matter of reasoned judgment applied to the specific company, not a fixed rule applied uniformly.

Ter illustratie, a small services company where the sole director also performs most client-facing work might justify a different remuneration benchmark than a larger company where the director role is primarily supervisory, even if both report similar revenue.

The adjustment interacts with other normalisation items

Director remuneration is one of several related-party items that a valuation report examines, alongside matters such as rent paid to a director-owned property, or loans between the company and its shareholders. Reviewing these together gives a more complete picture of whether reported earnings reflect the business or the specific arrangements of its owners.

Why this matters for the reference date

Since the valuation is prepared as of a specific reference date, the remuneration structure in place around that date, and in the preceding years used to assess earnings, is the relevant period to examine. A change in remuneration policy shortly before the reference date is a detail worth noting in the report.