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Whatever you end up doing, write everything out in a contract - The payment details and the exact responsibilities he'll have. It will save the both of you serious stress as time goes on because neither of you are making assumptions. Many a friendship has been ruined because of a lack of a contract when the two friends entered business together.
I think that you need to figure out first what you want - a partner, an employee, or a contractor. A partner means that they also have say in the direction of the business and share in the ownership. An employee will come with additional responsibilities like worker's comp, health insurance, retirement savings, etc, but you also have use of their full services. A contractor means that they should have other clients as well, but you're not on the hook for benefits.
Once you figure out what you want out of the relationship, it can help eliminate some of the payment options. From there, you need to do a cost/benefit analysis based on what you will earn with his services. Make sure that you're still making a profit. How much of a profit you're comfortable making determines the ceiling for how much you should pay him. After that, negotiate.
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