Management Remuneration Normalisation in FDD
How FDD analysts normalise management remuneration in EBITDA: the rationale, benchmarking methodology and common disputes in deal negotiations.
Management remuneration normalisation is one of the most common — and commercially sensitive — EBITDA adjustments in Financial Due Diligence. In owner-managed businesses and founder-owned companies, management compensation is frequently set at levels that reflect personal preferences, tax optimisation strategies or historic arrangements rather than market norms. Adjusting for this is both technically necessary and commercially important.
Why Management Remuneration Needs Normalising
When a business is acquired, the buyer replaces the existing management team or renegotiates compensation packages. The EBITDA that the buyer is paying a multiple for should reflect the cost of management at market rates, not at the historic owner-manager level.
Two common scenarios:
Over-Paid Management
An owner-manager pays himself a salary of €800k per year, while a professional CEO for a business of this size would typically earn €350k. The €450k excess reduces EBITDA by €450k — creating a positive normalisation adjustment that increases adjusted EBITDA.
Under-Paid Management
Conversely, a founder working full-time in the business takes minimal salary (€80k) while the true cost of a replacement CEO would be €280k. Here, management compensation is understated, and an adjustment reduces EBITDA by €200k.
The Normalisation Methodology
Step 1: Identify Total Management Compensation
Include all forms of compensation:
- Base salary
- Bonuses and profit-sharing
- Pension contributions
- Benefits in kind (company car, healthcare, life insurance)
- Dividends paid to owner-managers (if these effectively substitute salary)
Step 2: Benchmark Against Market Rates
The adjusted rate must be defensible. Sources for benchmarking include:
- Comparable public company disclosures
- Sector salary surveys (Korn Ferry, Mercer, Robert Half)
- Recruitment agency data for equivalent roles
- Recent placement data shared by the buyer's HR adviser
Step 3: Agree the Adjustment
The difference between actual compensation and the benchmarked market rate is the adjustment. This is typically presented as a range rather than a single number, given the subjectivity of benchmarking.
Common Disputes
- Multiple owner-managers: In a family business, several family members may hold executive roles. Each needs to be benchmarked independently.
- Post-acquisition plans: If the buyer intends to retain the management team and renegotiate packages, the normalised rate should reflect the expected post-acquisition cost.
- Non-executive roles: If an owner-manager has transitioned to a non-executive role but still draws a large salary, the adjustment should reflect the lower market rate for a non-executive.
The Seller's Perspective
Sellers on a sell-side process want upward normalisation (i.e. they want to demonstrate that management is overpaid relative to market, so the buyer effectively "gets" that cost back). Sellers resist downward normalisation (undercharging management) vigorously.
Conclusion
Management remuneration normalisation is a standard FDD workstream that requires accounting rigour and commercial judgement in equal measure. Candidates who understand both the mechanics and the negotiating dynamics will handle it well in TS interviews.
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