Hiring another Fractional CFO to join your team is a risky decision!

Bringing in someone that’s even remotely qualified is going to run you at least $150,000 a year and can go as high as $300,000+.

And if you can’t land clients fast enough to cover that burden, it could easily sink your firm in just a few months.

But if you DON’T hire someone, how are you ever going to get out of client services so you can scale your firm? 

Fiddlesticks! 
Sorry for the f-bomb.

If only there was a way for newer firms that don’t have a predictable stream of new clients yet to hire a great Fractional CFO without risking it all… 

How to Think About Hiring a CFO (Without Risking It All)

At my firm, Civil CFO, I pay our CFOs a fixed salary as W2 employees. But that’s not what I did when my firm was just starting out, and it’s not what I recommend for most firms.

I actually think it’s incredibly wise to start with a less risky comp model:

Revenue-based compensation.

In this model, you don’t guarantee a large monthly paycheck from Day One. Instead, you offer to pay the CFO a percentage of the revenue from each client they handle. Over time, as they handle more clients (and more complex clients), your business’s revenue will grow—and so will their total pay.

Here are 3 reasons you might want to consider revenue-based compensation as you think about hiring. (At the end, I’ll even reveal the exact percentage I paid my CFOs when I used this compensation model.)

#1. Three-Way Alignment

Paying your CFOs a percentage of revenue keeps everyone’s interests aligned:

• Your firm’s interests
• The CFO’s interests
• The client’s interests

Why is that?

When a CFO works for a fixed salary, their paycheck is indirectly tied to client service. Client cancellations don’t affect them (unless they’re so clearly at fault that you fire them). Sure, they want to keep clients around and have long-term relationships. But that goal doesn’t dictate their day-to-day behavior.

In contrast, when a CFO is paid a percentage of revenue, their paycheck is directly tied to client service. The better they are at keeping clients happy, well-served, and loyal for the long term, the larger their paycheck grows over time. This incentivizes service and efficiency.

Earning a percentage of revenue incentivizes service and motivates the CFO to make sure they’re serving their clients really well each month. Because just as though they were a solopreneur, if that client leaves, they lose income every month thereafter. Because of this, they want to make sure that they're not just phoning it in. They show up and take care of their clients.

This model also incentivizes efficiency because the CFO wants to handle as many clients as possible. They earn more money the more clients they handle. This aligns their own interests with the firm’s interests, because the firm wants more clients (for more profitability) and they want more clients (for more take-home pay). Each CFO is encouraged to work with the leadership team to figure out: How can he handle more clients? How can he grow his workload from 7 clients to 10, or even 12?

#2. Consistent Margins

Forecasting and projections are so much simpler when most of your payroll is percentage-based. As a newer firm owner years ago, I appreciated this predictability. I always knew what our gross margin was going to be. That was one number that never worried me. 

I never faced the situation that’s familiar to many of you: “I’m not making enough margin off of Andrew. I’ve got to get him two more clients, otherwise it’s just not going to work out.” Paying a percentage of revenue avoids that entirely. If Andrew isn’t efficient, then the firm’s margins are still the same. And if Andrew is efficient, he reaps the rewards of his efforts.

With this model, you know you’re paying your CFOs fairly—and that it’s good for your firm too. You never have to ask yourself, “How can I load as many clients as possible onto this CFO, so I make sure I’m extracting enough value in return for the $150,000 salary I’m paying them?”

#3. Growth-Minded Hiring

Warning: This compensation model will make your hiring harder. How? It will shrink the talent pool.

We entrepreneurs are abnormally comfortable with risk. That’s why we were willing to give up the security of a steady paycheck in exchange for the excitement (and occasionally despair) of building our own firm. Most people shrink back in horror at the thought of a paycheck that rises and falls each month depending on their performance and the natural up-and-down of client churn.

You’ll need to seek out entrepreneurially-minded CFOs with high self-confidence who are attracted to the potential for growing their earnings. They are harder to find. But when you find them, they’re an asset to your firm.

The Percentage I Paid My CFOs

Okay, it’s time to answer the question everyone asks—and that I promised to answer at the start of this article.

What percentage of revenue should you pay your CFOs?

The overarching principle is that you must pay enough:

• To attract and retain the talent,
• Without risking your firm’s survival.

When I used revenue-based compensation, I would normally pay our CFOs 40% of client revenue. That applied if I brought in the lead and closed them as the firm owner. I would pay an even higher percentage if the CFO sourced the lead independently, and then either closed it himself or let me close the deal.

You Must Charge Enough to Support This

Before you decide to pay a percentage of revenue, you must double-check that you’re charging your clients enough to support this model. Say you want to pay your CFOs 30% of revenue. But you only charge your clients $2,000 a month. You’ll never get an “A Player” with that setup: The CFO would need to manage 15 clients to earn what he’s worth.

A Recipe for Disaster

Let’s be honest here: the idea of hiring another Fractional CFO can be terrifying.

But I’m here to tell you firsthand that if you’re willing to hire another CFO to join your firm and get you out of client work, it can be one of the most rewarding things you can do. 

The good news is that the comp model I just teed up won’t sink your firm even if things go wrong.

There are three other potentially huge mistakes you can make as a firm owner that could lead to you crashing and burning. You can read about them and learn how to avoid them HERE.