A Guide for Principal Compensation in #Architecture & #Engineering Firms... Principal compensation is important for sustaining engagement and ensuring the financial health of architecture & engineering firms. David C. Baker’s great article (linked in the comments) outlines considerations to create a fair compensation strategy for principals at creative firms. Before we dive into parts of David's framework, it's important to clarify that principal compensation does not come from profit distributions. Firm owners should be paid on a regular schedule in the form of a salary or draws depending on your local tax benefits. This compensation should be paid prior to calculating firm profitability. Profit is then distributed AFTER regular compensation is paid to principals and employees. 1️⃣ Compensation Streams: Principals should be compensated for 3 separate things: ownership, effort, & risk. For instance you own a part of a firm but don't work in the firm on a day-to-day basis, thus you are compensated for ownership but not effort. You could loan the firm money in a time of need, increasing your risk, and you should be compensated with interest payments. And you should be paid for the work you do in the business - your direct contributions. 2️⃣ Value Contributions Equally: Recognize unique strengths and contributions from each principal without direct comparisons. You should leverage individual strengths and prevent unhealthy competition. For instance, a principal focused on business development should be paid the same as a principal focused on technical work. Both are valuable contributions to the firm's success. 3️⃣ Ownership Percentage: Principals with significant ownership (20%+) should receive equitable fixed compensation - probably the same amount - in recognition of their stake in the firm's success. Profit distributions above the base salary should be proportional to ownership percentage. 4️⃣ Competitive Base Pay: Principal salaries should be higher than the highest-paid employee, demonstrating the value of their leadership and risk as a business owner. It should be at a level that is motivating enough for their continued engagement in the business. 5️⃣ Firm Size Considerations: Large firms should provide higher principal compensation, reflecting the bigger responsibility. Compensation should scale with the size and complexity of the firm. Compensation Benchmarks based on David's research: 1–4 people: $120K 5–8 people: $170K 9–12 people: $220K 13–16 people: $270K 17–20 people: $320K 21+ people: $370K 6️⃣ Taxation & Compensation: Taxation is a separate consideration from compensation. Firms should ensure principals receive a predictable income through fixed or distribution-based pay. Work with your accountant to find the best tax advantaged way to distribute this compensation to all owners. This guide can help A&E firms establish a compensation strategy that is equitable, motivating, and aligned with long-term business goals.
BQE Software
4mo
#Architecture #Engineering #BusinessofArchitecture #BusinessofEngineering #EntreArchitect #PrincipalCompensation #Compensation #SmallBusiness #FirmManagement #FirmManagementSoftware #BQECORE
Lucas Gray
4mo
David Baker and his Podcast with Blair Enns - 2bobs.com - is a fantastic resource with so many great lessons that architects and engineers could learn from.
Asif Nazir
4mo
Insightful!
David Baker's Article: https://punctuation.com/a-framework-for-principal-compensation/