An intriguing article, published recently by BVR on its BVWire blast email, reminds us that executive compensation is one of the most important components of a business valuation. The article summarizes a lecture given by Brian Brinig at the California CPA 2008 BV Conference, in which he challenged the term “reasonable compensation adjustment” as well as the methods that are commonly used to arrive at this normalization adjustment to the income statement.

Mr. Brinig would prefer the term “fair-value-of-the-owners’-services adjustment,” which is a mouthful but comes closer to describing the real objective: determining what it would cost to replace the owner with an equally qualified and competent manager. Brinig also indicates that by phrasing the question in this way, valuation professionals can avoid the mistake of valuing non-transferrable goodwill. The question is not whether a neurosurgeon is unreasonably compensated but whether another professional could be hired to replace the neurosurgeon, and at what price.

BVWire also considered whether valuation professionals, who are not generally trained or experienced in executive compensation matters, can qualify to give expert opinions in litigation on this subject. The verdict? If judges are unwilling to disqualify business appraisers from giving testimony on the subject, it must be okay to do so.