Profitability Versus Owner Compensation

January 21, 2013
A recent email from a contractor in St. Louis was critical of our selection of business management articles. Steve Seliga, owner of Seliga Heating and Air Conditioning said, “For 40 years I have read many articles about profitability. They are very important to remind us of the primary objective, but I have never read one where you talk about total-owner compensation. I think that it would be good for the industry if you wrote an article that explained that success is not just bottom-line profit; it’s total owner compensation.”

A search of the archives of articles from The NEWS, dating back to 1999, showed he was right. I also did some searching on Google and found only a couple of references to “HVAC Contractor Owner Salaries.” Careerbuilder.com indicated that the average HVACR contractor earns $69,461 annually. I was shocked that simplyhired.com pegged owner salary at $46,000. These figures seemed low to me. The owner of an HVAC contracting business has to wear several hats and is responsible for the livelihood of numerous employees.

Armed with this information, I called Seliga and we talked for quite a while. That led to phone calls to other contractors and industry consultants that work with contractors. A picture began to emerge.

Compensation Based on Gross Income

Seliga mentioned that he’s participated in peer groups over the years, allowing him to look at the financial statements of more than 20 companies. He said, “People tell me they had a good year and made 5-percent or 10-percent profit. That’s meaningless unless more money goes into your pocket.”

He believes contractors need to establish a percentage of their gross income to determine owner compensation. In his opinion, that figure should be closer to 15 or 20 percent. Owner compensation means salary, bonus, and other company benefits.

Keith Graff, owner of Gra-Tac Heating and Cooling Inc. in Bowling Green, Ky., participated in some of Seliga’s aforementioned peer groups. He agreed that most contractor owners pay themselves an average to below-average salary, and then hope for a profit at the end of the year.

When I talked to another peer group member, David Allen, owner of Allen’s Air Conditioning in Tuscumbia, Ala., he said, “This is a tough business and if you are going to do it right you should be well compensated.”

Owners Tend To Underpay

David Holt, director of sales and service leadership at National Comfort Institute felt many owners pay themselves less than they are worth because most of their experience comes from the technical side of contracting, and not the business side. Therefore, they underestimate their value as leader of the company. He felt that owner’s compensation should be 8-10 percent of gross revenue.

Tom Grandy, founder and owner of Grandy & Associates, with 30 years of experience in providing business training to the HVAC and plumbing industries, agreed with Holt, saying owners tend to underpay themselves because they’re operating with a technician’s mindset. They are more focused on working in the business rather than on the business.

An owner is ultimately responsible for his company’s performance. His guidance is the difference between sustained growth and Chapter 11 bankruptcy. So, are you an owner that started out as a technician? Are your revenues over $1 million dollars, but, you can’t seem to make enough money to pay yourself a decent salary? Here are some words of advice from my “ad hoc” panel of experts:

• If you don’t pay yourself a decent salary, you tend to price your services too low and at the end of the year you don’t make any money (Seliga);

• Shoot for a double-digit net profit after you have paid everybody including yourself. That is what you deserve (Holt);

• If you are running the business and pointing it in the right direction, then what would you pay someone if you couldn’t do it (Allen);

• Find out how much you need to earn to make a living for your own family first. Then, use this amount as a guide for your compensation as the owner of the company. Your “bonus” will come from the 10- to 15-percent net profit the company should be shooting for (Grandy); and

• Pay yourself based on what you would pay an experienced general manager to run your business (Graff).

Send Us Your Thoughts

So there Steve Seliga. We now have something in our archives relating to owner compensation. But, I’ll admit, this doesn’t even begin to cover the entire subject. Are you an owner of an HVAC contracting business? Send us your thoughts. Your contribution may be the second of many in our growing library on the subject.

Publication date: 1/21/2013 

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