12 Tips on Deciding Your Own Salary as a Business Owner

It’s your company—and you’re the one who has the most at risk, financially and otherwise, if it fails. But you’re also in the unique position of setting the tone for what will hopefully be a thriving business. The question is, how do you decide what your own salary should be?

 

 

1. Pay Yourself Less to Start

You’ll have the big payoff down the road, right? If so, it’s fair to pay staff more than you to start. If they know it, they’ll appreciate your sacrifice more and be willing to work harder for you. Plus, paying yourself less means you’ll have extra funds to hire an extra employee, or invest in other growth areas. Paying yourself less provides the right incentives for the long run.

2. Consider Your Exit Strategy

This depends on your exit strategy. If the goal is to grow the company as fast and big as possible to be acquired, increasing salaries stunts the growth of the company because that money could have been invested back into the business. On the other hand, if the goal is to create a lifestyle business with no intention of becoming acquired, then pay yourself enough to buy that shiny sports car!

3. Use a Three-Pronged Approach

When looking at salaries (management or staff) we keep the following three considerations in mind: 1.) Comfort: We need people focused on their jobs, and not survival. 2.) But, without getting too comfy. They still need to be hungry enough to want to advance the company. 3.) Reinvestment: We make sure to reinvest enough of our revenues back into growing the company for everyone’s future benefit.

 4. Don’t Live on Ramen

Make sure your take-home salary is decent enough to keep your family happy. It does no good for you, your family, or your business if you are always stressed out on these fronts. A peaceful mind can bring amazing results in business, trumping the shortening of your runway a tad.

5. Ask Your CPA or Financial Planner

In the early days, founder salaries should be as small as possible to keep money in the business. My co-founder and I celebrated our one-year anniversary by doubling our monthly salaries from $1,000 to $2,000! As your company grows and cash flow improves, work with your CPA to make sure you’re taking everything into consideration for your compensation, from taxes to retirement planning

6. Pay Yourself Base Plus Percentage of Growth

If your start-up is in the black, then you should definitely pay yourself a reasonable wage. You may not ever see an exit, so making sure you have a reliable salary is important. Start with what you feel you can comfortably live on and then attach a bonus to the percentage you grow month over month. It’s a great way to give yourself a little reward and taste the fruits of your labor

7. Calculate the Cost of Your Replacement

When you are first starting out, every dollar counts. From the days when you are not paying yourself a salary or taking a rent-only salary, it’s pretty easy to undervalue yourself. Once you get past break-even and you are trying to decide on a payment schedule, think about how much you would pay a salaried employee who would replace you. What would that CEO/founder be worth?

 8. Use One Standard for Everyone

You need to have a standard calculation of payment for each job—one method for determining all salaries. Being an owner of the business is distinct from being the CEO; you have equity in the company as well as your pay. How you determine your pay must be the same as how you decide everyone else’s.

9. Incentivize Yourself

Incentivize yourself in a similar way to how the rest of your team is incentivized. You have to deliver just like they do, and that way you can base your compensation on the percentage of company growth and other data-driven metrics.

10. Live Well, But Not Like a King

Build from the ground up what your living costs are, month by month (the essentials—rent, car, food, medical, insurance). Then add in some leisure. See where it’s at compared to staff. Live well, don’t live like a king—if you’re convinced of success, short-term cash is of little import compared to equity. It also motivates employees and investors if that confidence is shown.

11. Don’t Compare

Pay staff members whatever you need in order to keep them from leaving. Pay yourself whatever your CPA tells you to.

12. Practice Fairness

This can be a really tough call for anyone at the top of the chain. Practice fairness to the best of your ability, and do your absolute best to make sure that all of your employees are getting rewarded sufficiently for their talents and work. Taking good care of your employees should be a big priority.