Setting Salary and Compensation Levels in Your 8(a) Business
Although the Small Business Administration relaxed its outdated “excessive compensation rules” in 2011, there is still some confusion about how 8(a) certified companies should set their officer and owner salary levels. Here are some general tips and advice on how to establish reasonable salary and compensation levels for your 8(a) business:
- Keep executive officer salaries reasonable for your industry and your geographic region.
- If challenged about salaries by the SBA, provide evidence in the form of data and documents from websites such as www.payscale.com or the U.S. Bureau of Labor Statistics to prove that your salary is reasonable for your position, your education/experience level, your industry, and your region of the country.
- The SBA often warns participants that the 8(a) program is a “business development program and not a personal enrichment program.” Bear this in mind when determining how much revenue is allotted towards executive salaries and compensation versus how much revenue is retained as earnings in the company bank accounts.
- Use common sense when withdrawing money from your company for owner draws/distributions or for other personal gain. Use the following litmus test, for example: If the Washington Post newspaper published all of your salary and compensation data today, would the public react to the data with acceptance or anger? If the likely answer is “anger,” then you have probably taken too much money out of your company.
- Do not allocate so much company revenue to salaries and compensation that you destabilize the financial health of your company. You need several months’ worth of operating cash in your company accounts for working capital purposes in case you receive a large federal contract and need to finance equipment, staff, or resources in advance of receiving any payments from the government.