When you are the owner of your own business, one of the most difficult decisions you will make is how to pay yourself and how much to pay yourself. First, there is the issue of adequate cash. If you are doing things on a shoestring, you may not have enough money to pay yourself. Suppose that you do, but it will be a struggle. You might opt to pay yourself but to not run the pay through all of the deductions. In other words, you treat yourself as an independent contractor — or maybe you just borrow enough money to meet your monthly needs.
On the other hand suppose you properly capitalized the business — either with your own money, investor money or bank loans. In this case you can pay yourself and pay all of the associated payroll expenses. But how much do you pay yourself?
In either situation, I suggest that you go back to the projections you made when you first started looking at the business. In those projections, you included expenses for salaries and you had a number in those projections for yourself. Or, you should have.
What was it? How did you arrive at that number?
One way would have been to consider how much you wanted, how much you needed to live on. A second way would have been to come up with a figure based on what you were worth. If your last position was President of a multi-national corporation, and you were paid a million dollars a year — then that’s what you are worth. Right? A third way would have been to establish a salary based on what the going rate is for a person to do the job in a business similar to the one you now own. Industry statistics are available and this amount should be fairly easy to determine.
But you bought or started this business because there were things you and you alone were going to do to make it an incredible success. You could never find a person who would be able to do what you have the vision to see and to accomplish. You can easily convince yourself that you are worth more that the industry average.
And last, since you own the business, (without investors for this example) you might feel that you are entitled to everything that is left, and you could just ignore the fine lines between salary, perks, bonus and distribution of profits.
I may be in the minority here, but I suggest that if you are serious about business and about making what you bought or started into a successful business — treat it like a business and run it as a professional manager would. In fact, go to the point of wearing two hats — a manager and the owner. While wearing the owner’s hat decide how to pay yourself while thinking about how you would hire and pay a well-qualified professional manager.
Separate compensation into parts. The first should be for showing up (basic salary). The second for perks to clear away the static that can prohibit performance (some clubs memberships do put you in contact with business prospects), and the last, a bonus based on some combination of increased sales (just a small piece) to increasing profits (a bigger piece) and making the projections within say 5% (plus or minus)…. the biggest piece.
As for the other hat, the one you as the manager wears, think about how you are going to improve the business and earn the bonus you will be paying yourself. Constantly focus on making the business better. Develop the fear that there is somebody out there who will be able to do your job better than you and when that person shows up — you are going to have to defend your performance.
Now back to wearing the owner’s hat, hold yourself, as the manager, accountable for making the projections, keep laying out bigger challenges for yourself as the manager; keep raising the performance bar. And keep a sharp eye out for that proven performer who walks in and wants the job of running your business.
When that happens, don’t be afraid to fire yourself.
Learn more about this topic in Chapter Twenty-seven in my book.
By Art Consoli
Entrepreneurs Pay Themselves What They are Worth — number seventeen in a series taken from:
How to Evaluate and Profit from a Business Opportunity – The Entrepreneur’s Guide
By Art Consoli
Art Consoli held eight corporate positions with Johnson & Johnson before starting his first business. He went on to build over twenty businesses from patents or ideas or from businesses others couldn’t make successful. These ranged from starting a veterinarian drug company to taking over a steel fabricating company to developing the first manufactured home subdivision to qualify for every private and government assisted mortgage program in Arizona. He also did ten workouts for lenders and owners; the last was a $30 million, 300 employee, precision parts manufacturing plant that made parts for the auto industry. Consoli’s unique background and skills allow him to speak and write about how someone with limited experience can do a self-evaluation which will let him decide which business opportunity is best, how to evaluate opportunities and gain control over the one which offers the greatest potential and then manage that business to success. Readers of his book call and write to tell him how much his book has helped their lives and improved their business.
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