How is Reasonable Compensation Determined?

There are multiple methods of determining reasonable compensation amounts. The oldest approach is known as the multi-factor method, and it considers all the facts and circumstances. One of the key facts is referred to as compensation comparability data. This data should be actual amounts that similar employers paid for similar services. The independent investor test focuses on the profitability, or return, available to the company’s owners after the compensation has been paid. If the investors' return is satisfactory, it may be presumed that the executives did not receive excessive compensation.