BrainTrust Query: Salary = Success

Discussion
Nov 05, 2010
David Zahn

By David Zahn, Managing Partner, Zahn Consulting,
LLC

Through a special arrangement, presented here
for discussion is a summary of a current article
from Getting Personal About Business,
the blog of Zahn Consulting, LLC.

American Express Open recently conducted
a study that was reported in the Boston
Herald
that discovered that half of the business owners did not collect
a salary. Of those that did, 44 percent were paying themselves a salary of
less than $50,000.

This may be in part a result of the temporary need for a
business to reduce spending to survive, and may not be totally reflective
of the total compensation that the business owner takes from the business.
However, it is still a startling insight that indicates just how difficult
many entrepreneurs are currently finding it.

While there may be times when
a business owner may make the decision to invest their salary back into the
business, if it happens more commonly than not, it is time to reconsider the
business model. While conventional wisdom would point out that it seems wise
to "put the business first," in fact,
it is best to put yourself first. If the business owner is not taking care
of his or her own needs, then the business will become something that is regretted
and viewed as drudgery, obligatory, and more of a drain than something that
sustains the business owner.

While there may not be a chart one can check to
see how much salary one should receive — as each business and business owner
are so individual and unique — the business should be able to spin off salary
on a consistent and regular basis. Conversely, it is also important for the
salary the owner takes not to be so high that it cripples the business and
becomes an impediment to long-term success.

Generally, a company’s profit can
be used as a guideline to set the owner’s
salary but, ultimately, whether or not a business owner can take the money
will depend on accounts receivables and cash-flow. If an owner is borrowing
money to sustain the business over a temporary shortfall, then the question
of whether to pull a salary becomes problematic.

But the business plan should
have been built to include sufficient income for the business owner to live
on. Failing to meet that threshold is indicative of an issue with the business
model, executional practices, and strategies.

Discussion Questions: When should and shouldn’t an entrepreneur take a salary?
How should an entrepreneur gauge his or her salary level?

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17 Comments on "BrainTrust Query: Salary = Success"


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Bob Phibbs
Guest
10 years 6 months ago

So many times we find business owners who have bought themselves a job– – and not a well-paying one at that. There are many factors at work but any business owner should be paying themselves, not just their employees.

Ben Sprecher
Guest
Ben Sprecher
10 years 6 months ago
As an entrepreneur who chose not to take a salary for several years, and who now does take a salary (albeit much lower than my market rate), I think that the decision is a complicated one. Factors to consider include: – Can you afford it? If you can’t put food on the table, then forgoing salary is not an option.– Is the company profitable? In the early years when getting a company on its feet, keeping every dollar in the business may be necessary.– Are there outside investors in the company? If you have (or plan to have) outside investors, then scaling your salary to meet the business’ needs is a strong signal to investors of your commitment to and investment in the company.– Are your family’s long-term needs being met? No matter what, starting a company is a marathon, not a sprint. Wise investors and entrepreneurs know that it’s much easier for an entrepreneur to keep full attention on the business if they are not stressed about finances at home. In the long run,… Read more »
Max Goldberg
Guest
10 years 6 months ago

Business owners should budget a salary for themselves, even if the amount is small. It’s tempting for a small business owner to show fiscal responsibility by not taking a salary, but this is foolish. Potential investors and lenders want to see owners compensated for their work. We advise all of our clients to build in a salary, however small, from day one.

David Livingston
Guest
10 years 6 months ago
I think the study is missing the point on taking a low salary. First of all the higher the salary the more payroll taxes are involved. Self employed people must pay at least 15.3% in FICA and Medicare taxes. Also federal and state unemployment tax (which you are not allowed to fire yourself and collect, how unfair is that?). The difference in payroll taxes is huge when you compare paying yourself $106,000 or $20,000. The difference is 15.3% of $86,000 or $13,158. Well I don’t know about you but I’d rather have the $13,158 for myself (and available to me now) and not give it to the government. Your corporation can declare a dividend or you can pass the profits through some other way, similar rental income, avoiding needless payroll taxes. A lot of business owners just give themselves one paycheck a year, which pretty much all goes to payroll taxes and 401ks. A business owner’s strategy should be to pay yourself a small of salary as your CPA suggests you can get away with… Read more »
John Boccuzzi, Jr.
Guest
John Boccuzzi, Jr.
10 years 6 months ago

Entrepreneurs should be running their own business for two primary reasons. 1) They love what they do and 2) The business provides for their family. If you don’t have both, it’s time to move on and try something new. The second reason does not apply to the start-up phase that may take a year or even two. I can’t imagine running a business that did not fulfill both, long term.

Ryan Mathews
Guest
10 years 6 months ago

Tax implications aside owners deserve salaries. Tax implications considered, those salaries will often be “below market.”

Paula Rosenblum
Guest
10 years 6 months ago

David Livingston has it exactly right. The number posed in the article is deceptive and essentially meaningless. There are other/better ways to run a small entrepreneurial business than taking big salaries.

Ian Percy
Guest
10 years 6 months ago

Most of us would agree that once you’ve tasted independence you can’t go back. Yet many of us remember the days where “self-employment” and “unemployment” were synonyms; at least if you asked our spouses.

Yes you should pay yourself first just like using an oxygen mask on the plane and of course there are many ways to get ‘paid’. But if anyone thinks that going into their own business (at least for the first few years) will make them a fortune and give them all kinds of free time there’s a brutal reality coming.

I’m convinced that the dream of having purpose, passion, and prosperity all at the same time is indeed the ultimate dream. Unfortunately too many these days struggle with just one of the three.

Marge Laney
Guest
10 years 6 months ago

If you’re a real entrepreneur the saying, ‘Hope springs eternal’ will resonate with you. Real entrepreneurs are a special breed of cat for which each new year brings renewed and re-invigorated hope that this will be the breakout year. Passion drives the entrepreneur, not a pay check. Is that foolish? In some cases, but for most the risks and sometimes lack of reward are worth it.

Entrepreneurs are not usually good employees or team players and the thought of pulling an eight hour shift for someone else is abhorrent to say the least. Unlike their employees whose lives start when they leave the office at five o’clock, the entrepreneur lives and breathes the business 24/7. So how do you compensate for that degree of commitment and effort? Monetarily it’s difficult to say, but much of the compensation comes from the joy of seeing the ‘baby’ grow hopefully into something that can produce something really great some day!

Ed Rosenbaum
Guest
10 years 6 months ago

Taking a large salary is not the answer. Too many tax implications involved that will not necessarily benefit the business. Taking a smaller salary at the beginning is a better plan. But the truth is the smaller salary taken is part of the money you originally invested in the business. Sometimes we budget to take a salary but miss the budget numbers because sales were slower to develop than anticipated. You must believe your business plan and business model will succeed. Then press on and make it happen.

David Zahn
Guest
10 years 6 months ago

Not sure if it is “fair” for me to comment on my own article, so I will refrain (other than to say that I am pleased that it generated this much interest and passion amongst the self-employed).

The issue is clearly not as cut and dried as it appears at first blush and the points raised are all worth considering. The United States tax implication argument is also dependent on organizational structure decisions (Corporation, Partnership, LLC, etc.). Other countries may have different advantages/disadvantages that are locally determined.

Of course, “hiding” income is never a suggested approach. Working closely with an accountant to ensure one is remaining on the right side of the law is advisable (as suggested, though making decisions for tax reasons is not an absolute in all circumstances…which is why it is smart to work with experts who can share greater insight than permissible in this short discussion).

Kai Clarke
Guest
10 years 6 months ago

As the president of a company and a part-time MBA professor, any business that cannot support its employees’ salaries (including the owner) needs to change its model or close its doors.

“Pay yourself first” is the key saying that all successful business owners need to subscribe to. When a company cannot support the most important employee on its payroll, there is something very wrong. Any company that cannot provide for this needs to adapt its business model, change its needs, or shut its doors. All businesses need to have this as the first rule of their business, and when profits do not allow for this, an exit strategy should be implemented.

Ted Hurlbut
Guest
Ted Hurlbut
10 years 6 months ago
A significant portion of my work is with independent retailers, and I don’t think the financial devastation many of them have gone through in the past couple of years is really very well understood. Typically, independents deal in pretty highly discretionary goods, and the sales hits that they took were generally far worse than those reported by the major national retailers. Many didn’t make it. Of those that have made it through, many have nevertheless been running negative cash flow from operations for over two years. They’ve kept their head above water by liquidating inventory, extending payables, tapping into personal savings and running up credit card balances. Many company balance sheets are showing pretty significant negative equity positions. So the question of salary must be considered in this light. Of course every entrepreneur should take a salary. Otherwise, it’s not a business, it’s a hobby. The relevant question at this moment in time is HOW? I’m a strong advocate of planning cash flow, so that the business has the budgets and benchmarks in place to… Read more »
Devangshu Dutta
Guest
Devangshu Dutta
10 years 6 months ago

There are entrepreneurs who’ve had to quit because their business couldn’t provide them even basic sustenance, and there are businesses which wouldn’t exist today if the founders had taken cash out during the early days.

No matter what the structure (even with a distinct corporation), if the ownership lies entirely with the founders, committed entrepreneurs will not only reduce the cash outflow to themselves, but also plow cash back in during tough times. Outside investors usually enforce more discipline–there are more barriers to taking cash out and bring cash in–therefore, a steady salary becomes more the norm.

Eventually, it comes down to the specific context and what the business and the entrepreneur can afford at the time.

Mark Johnson
Guest
Mark Johnson
10 years 6 months ago

I think that in the beginning, if you need to take a small salary or do some consulting like I did when I started Loyalty 360, it makes sense, but if you cannot afford to pay yourself after a period of a couple of years or have to not taken a salary periodically, it may be time to consider shutting your doors.

I admit I do not yet have the luxury of paying myself the salary I made in the corporate world, but it is going up and I hope will continue to go up. I would want to be in a position where I worked this hard and did not pay myself.

Mark Price
Guest
Mark Price
10 years 6 months ago

Rather than spend time discussion the nature of “salary,” I would like to address the issue of business owners taking little or no total comp in a year.

As owners of our businesses, we are in a constant struggle whether to take resources out of the business or invest them for more growth (or survival in some cases). This tension can lead us to take less than our fair share. Over time, this tendency can wear down owners and their families (particularly wives!).

If you examine a business over its lifecycle, the goal should be to invest heavily in the startup and growth phase and then to dial yourself back into the equation, as the business becomes more stable. We all need to do that, to avoid burnout and to maintain good relationships with our chairman of the board–our wives!

Fabien Tiburce
Guest
Fabien Tiburce
10 years 6 months ago

I think most entrepreneurs start a business to realize a certain vision while enjoying a degree of independence that is hard to get as a salaried employee. I am very concerned about the business’s cash flow but when it comes to me, just getting by is good enough. If the business does well, the owner will too. Success is hard to get, it requires a lot of work, a lot of persistence, creativity, adaptability and yes, a bit of luck. Paying oneself, while important in the long run, is usually not the first thing to cross the mind of an entrepreneur devoted to his/her business.

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