There’s always a lot of controversy over how much entrepreneurs & startups should pay themselves. If they pay themselves too much, they’re seen as greedy or not working hard enough to prove their ideas.
On the flip side, if they pay themselves too little, they end up getting sucked into daily tasks, and can’t fully focus on big-picture priorities.
So how much should a small business owner pay themselves? The correct answer (if there is one) mainly relies on what stage of business you’re in, your industry and your margin for profitability.
Some industries, like the non-profit sector, are much more closely regulated when it comes to withdrawing a large salary, than a technology-driven startup. Evaluate these five popular salary solutions before determining how to pay yourself as a business owner.
1. Percentage of the Profits
If you view your startup as an investment, and, therefore, your time and ideas as something that will pay off later, consider paying yourself a percentage of the profits it brings in. Similar to a commission-based position at a corporate job, the money you make has a direct correlation with your sales, and your incentive to grow the business.
The more successful your business becomes, the higher salary you’ll be getting paid, and vice-versa if your business is having a slow period. This could be the best method for a newer business that’s just starting out and may not have the income to support a high-paying salary.
2. Bare Minimum Plus Perks
In the beginning, or during slow periods, you have to be realistic with your business budget. It may not be possible to withdraw a large salary right now, but that doesn't mean you can’t be compensated in other ways.
There are lots of perks to being your own boss, so take this into consideration before settling on a high-income salary. If your company offers a lot of perks, like paying for your cell phone, a company car, travel expenses, and the like, then perhaps your personal salary can simply cover the bare minimum expenses.
Take the fact that your business pays for extras and offers perks as a way for you to draw a lower salary. At least until your startup is able to comfortably afford to pay you more.
3. Market-Based Wage
What’s the going rate for your job position or title? If you were to pay someone else to step into your role, what would their salary be? These are the questions you’ll need to determine how much you should be getting paid, with the market-based wage method.
Check out sites like Salary.com or Glassdoor.com to view the going rate for job positions and titles. If you aren’t willing to pay yourself a decent salary, it will hard for you to get past the mindset of properly paying your team of employees or contractors. So keep that in mind.
This also sets a high standard of performance since you’re being paid a higher salary, and need to make sure your work is producing a profitable outcome. Consider setting an example of a wealth mindset for those who work with you, that you’re worth getting paid market value, as are they.
4. Profit First
Too many entrepreneurs get caught up in the “whatever money’s leftover” approach to getting paid, and undervalue their time and energy. Instead of taking whatever profits are left at the end of the month to pay your salary, consider the Profit First method, as taught by successful entrepreneur, Mike Michalowicz.
With this strategy you’re flipping the script on the sales - expenses = profit formula into a much more profit-driven mindset of sales - profit = left over for expenses. This (subconsciously) forces you to spend less, and reward yourself with profit first.
Make an effort to pay yourself first, and watch the wealth paradigm shift that your business goes through. You want your business to work for you! That’s why you become an entrepreneur in the first place, right?
So even if you pay yourself a small amount, make sure you’re not living paycheck-to-paycheck. Use the Profit First strategy to increase profitability from day one.
How long have you worked in your industry? Are you viewed as an expert in your field? Your age and experience are also a factor when figuring out how much you should get paid.
If you’ve been working on this same career for decades, you’ve learned a lot of tips, tricks, and lessons along the way. Take that into consideration as your business progresses.
If you were to start another business, you’d have a much higher lever chance of success than if you started a new business in your twenties. Because of this, the risk factor has greatly decreased in respect to how much you’ll gain in return for those years of experience.
No matter what type of salary method you choose to go with, your age, experience, industry, and size of your team are all contributing factors that should be carefully considered. Don’t underpay yourself simply because you don’t think you can afford it. Find a way to get paid what you’re worth, while still keeping the bottom line in mind.
The goal is to create a business that offers you the freedom to have creative expression and do your best work, while getting paid enough to not stress about the bills.