Being your own boss and putting yourself on payroll can be a daunting task. Business owners have to have money to live off of, but they may struggle with determining how much that amount should be. But not all business owner salaries are created equal; there are often huge disparities. Some pay themselves a base salary. Others calculate their salary as a percentage of profits.
BlackEnterprise.com reached out to members of Young Entrepreneur Council (YEC), an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched StartupCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses. BE asked YEC: How much salary should I pay myself as the owner of a business? Here’s what they had to say:
1. Base Salary + Bonus After Year X
I have always paid myself the minimum base salary to be comfortable. Then after year X, I give myself a decent bonus. Going this route allowed me to reinvest into the company and speed up our growth.
2. Just Enough, With Raises as You Grow
This question definitely has a lot of variables. But one thing is for sure — most businesses rely on cash to survive. Having a healthy balance sheet is my favorite way to get a good night’s rest. I prefer to pay myself enough to live and put a little away for my son’s college education. As the business grows, evaluate your salary as you would any employee, and give raises when warranted.
3. Enough for Your Business to Be Comfortable (Not You)
Contrary to the idea that personal comfort is a major factor in building a business, the fact is that those who want to live comfortably had better stick to their stable, low-risk 9-to-5 jobs. Entrepreneurs endure immediate discomfort for long-term gain — salary included. So, either rely on prior savings or settle for subsistence living until you’re well into the black. Your future self will thank you.
4. Adjust During the M&A Process
If it’s early in the life cycle of your business and you are in growth mode, you should pay yourself as little as necessary. However, if you are at a later stage of your business and prepping for an M&A process, you MUST pay yourself enough to live the life you want to live. Compensation is a critical part of the M&A process so make sure you pay yourself enough so it continues post transaction!
5. The Rule of Thumb
No more than 4x your right hand, not more than 20% of the profit or projected profit for a startup, no more than 1-2% of gross projected revenues, or hey, whatever you think you deserve, because who’s better than you, buddy? Don’t worry, because no one will care what you make or compare your compensation or lifestyle or try to make you the bad guy at the top.
6. A Discount on Market Rate
While it is important to stay driven, you must never go hungry (literally). It is irresponsible to overpay yourself, but you’d also be doing you and your company a disservice by budgeting a meager salary for the CEO. As the owner, you should earn enough to live comfortably, though not lavishly. With a modest salary, you eliminate stress and anxiety caused by an empty bank account.
7. Market Rate + Draws When Company Is Profitable
Sometimes at the beginning you may be able to defer your compensation as you work to grow the company. But many entrepreneurs make the mistake of working for free for far too long. Be sure to pay yourself a market-based wage and then take draws when the company is profitable.
8. Listen to Your Accountant
Pay yourself whatever your accountant tells you to based on your profits.
9. Timing Is Everything; Calculate Accordingly
If your business needs money for a higher return in the long run, make the decision to pay yourself less at first. Timing is everything and your needs will change. For instance, when I knew I wanted a home, I began paying myself 2 years prior a higher salary so that I would qualify for a loan. By paying myself less at first my company grew quickly, enabling me to pay myself more when I needed it.
10. Use Current Expenses to Calculate Base
Look at all of your personal expenses that must be paid (rent, car payments, student loans etc.) Then that is your base number. Then think about your variable costs, such as food, gas and entertainment. Use a service like www.mint.com to track your spending to get an idea of how much you spend in each category. That is a starting point for your salary.
11. Invest Back Into Your Company While Living Comfortably
I don’t suggest you live like a pauper, though some owners choose that path. Know your goal. If you’re looking to raise money, one thing investors look at is how much you pay yourself compared to company revenue. The higher percentage of revenues eaten up by your salary, the less your chances the investors say “Yes.” Take the minimum salary that allows you to live without mental stress.