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company’s compensation-to-sales ratio of 7.1 percent;19 and (4)
the guideline companies’ net margins. The financial information
used in the four methods was obtained from the guideline
companies’ financial statements. The table below reflects Mr.
Hakala’s range of reasonable compensation for Mr. Reeves,
computed by applying the four methods to the guideline companies’
financial information:
18(...continued)
0.002365149(X). The regression equation for 1996 was Y =
325357.1548 + 0.002408813(X). Y equals CEO compensation and X
equals revenue. Mr. Hakala’s report did not explain how he
configured the variables used in the regression analysis.
19 The sales ratio is CEO compensation divided by company
sales, expressed as a percent. Mr. Hakala’s report stated that
he used the sales ratio from only one of the five guideline
companies, Natural Health Trends Corp (Natural Health), because
it was the highest of the five companies’ ratios. Natural
Health’s sales ratios for its FY 1995 and FY 1996 were 9.4
percent and 7.1 percent, respectively. Without indicating his
reasoning, Mr. Hakala applied Natural Health’s sales ratio of 7.1
percent to petitioner’s sales for both FY 1995 and FY 1996.
However, he should have computed the guideline company’s sales
ratio for FY 1995 by multiplying Natural Health’s sales ratio of
9.4 percent by petitioner’s sales for FY 1995, not the sales
ratio of 7.1 percent. This computation would make the FY 1995
guideline company percent of sales $1,175,186, instead of
$887,641.
Because the Court does not consider petitioner and UMI as a
single company, i.e., combine their income, reasonable
compensation under the “percent of sales” method for petitioner
for FY 1996 is $405,388 instead of $409,323.
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