Travel$ense User's Guide (PDF, 139 MB) - NBAA

170TRAVEL$ENSEEngineering firms had similar rates for nongovernment clients. For majorgovernment contracts (where rates were established under the terms of thecontract) the engineering firms billed at an average rate of two-and-a-half tothree times the annual base salaries for professional employees.FIVE TIMES SALARY METHODThe insurance industry has extensive experience in determining the values ofkey individuals within companies for both writing and underwriting business lifeinsurance. While various methods have been devised and the computationsprovide a relatively wide range of results, from multipliers of approximately fivetimes salary to multipliers over 10 times salary, several methods are used asstandards and appear reasonable. A common method used is the Five TimesSalary Method.This method has been used by insurance companies primarily as a standard forkey man insurance to establish a maximum limit. 19 It also is a basis fordetermining a cost advantage under management valuations in corporateacquisitions. 20It should be noted that while the method is called the Five Times SalaryMethod, the current application of the method uses total compensation as themultiplicand rather than salary only. 21The rationale in the insurance field for using this method is as follows:• In most cases, a replacement can be found and trained within a five-yearperiod.• The method would capitalize the compensation at approximately a 20percent rate of return over a five-year period. 22The first rationale suggests an indemnification for the key man or thereplacement’s salary, and the second suggests an indemnification for loss ofprofits. The Five Times Salary Method is obviously quite simple to apply. It is,however, insensitive to specific circumstances of a company or an industry.TEN PERCENT METHODThe 10 Percent Rule of Thumb Method is another valuation method used inkey man life insurance. This method states that a company should buy as muchlife insurance as can be purchased with an amount equal to 10 percent of the19 Op. Cit., Smith, J.C., pp. 647-661.20 Gimmy, A.E., and Reiff, W.W., Assigning Values To Management Contracts, Mergers & Acquisitions,January/February 1986, pp. 77-81.21 Op. Cit., Todd, J.A., p. 27.22 Op. Cit., Brown, R.A. and O’Neill, J., p. 348.Copyright © 1999, National Business Aviation Association, Inc.