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adequately balance the company's financial fitness and
role in the market, and the employee's responsibility
for that role. They also require a suitable comparison
of the employee's compensation to other employees in
the same company, and similar employees in analogous
companies--sturdy benchmarks for determining the
reasonableness of an employee's reward. And, these
considerations properly patrol a company's ability to
substitute salary for dividends by recognizing, in the
first place, a shareholder-officer's temptation to do
so, and, then, by focusing on the disinterested
investor's perspective.
Petitioner's position is that an investor in a closely held
company such as petitioner, dominated by family members, should
be satisfied with a return equal to or even less than the return
paid by a company listed on a major exchange. If that were the
law, any amount of compensation would be regarded as reasonable
as long as a minimal average return, computed by adding
appreciation as well as actual payments to shareholders, was
reflected on the company's balance sheets. We believe that
petitioner's premise is erroneous. We conclude that a
hypothetical independent investor would not accept Lynn's
compensation as reasonable where consideration is given to all
relevant factors.
"Contingent Compensation Formula"
Petitioner contends that the $302,340 and $410,000 bonuses
paid to Lynn during the respective years in issue were pursuant
to a formula adopted in 1982 by which Lynn's annual bonus would
be equal to approximately 11 percent of sales. That argument is
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