10 Questions to ask when setting your own salary
23 March 2015
Posted by: Author: Lisa Girard
Author: Lisa Girard (Entrepreneur Magazine)
become entrepreneurs because they don’t feel they’re getting paid enough for
the work they do in the corporate world. Ironically, they may find themselves
even lower on the salary scale when they open their own business.
"They’ve made hundreds of
thousands, even millions, for people, and just made a salary, so they go into business for
themselves,” says Jack Chapman, author of Negotiating
"But then it
becomes difficult to know how much to take out of the business, especially in
the early days.”
trying to figure out your salary, consider how much your time is worth, whether
it’s a good time to take money out of the business, and whether there are alternative ways of making
ends meet for now. These 10 questions can help you settle on the right amount
for you and your business:
10. What do other people in top management make?
says you can find some pay parameters by checking out various online sites to
see how much other executives are being paid. He recommends Salary.com, which gets its data from larger corporations, PayScale.com,
whose information comes from the executives themselves, and Glassdoor.com, a free jobs and career community that includes
"While these sites are not targeted to entrepreneurs,”
he says, "you can find a business similar to yours, see what people are getting
paid, and use it as a benchmark for what to pay yourself.”
9. How will other employees react to my salary?
often strapped for cash, sometimes attract and retain key employees by
offering them equity and other types of non-cash compensation. If that’s the
case for you, your employees may react negatively if you collect a fat pay
Employees – and investors – expect the founder or
founders to apply the same compensation policies to themselves, says Joan
Farre-Mensa, assistant professor of business administration at Harvard Business
School. "If the entrepreneur is drawing a big salary, this can be interpreted
as lack of confidence in the future prospects of the company, negatively
affecting employee morale.”
8. How many jobs am I doing?
If you’re acting as CEO, purchasing agent, salesperson
and social marketer, you deserve to be paid for those jobs, or at least a
portion of what it would cost to hire people for those jobs, Chapman says. "If
say you’re doing jobs that would cost you R1 000 000 to hire out, you might
keep 50% of that for yourself – if the business can handle it.”
7. What is my cash flow, now and in the future?
Your salary will, of course, depend on cash flow – not
only current cash flow, but even more important, future cash flow, says Steve
Trojan, a CPA who specialises in small businesses at SMT & Associates, an
accounting firm in Crystal Lake, Illinois.
He recommends that before starting a business, you
develop financial projections to help understand how much cash flow will be
generated over time, how much will be needed to expand the business, and how
much might be available for your personal expenses.
This will help you understand how much money you
should set aside for living expenses before starting the business and whether
you might need a part-time job in the early stages of your start-up.
6. What does my company’s growth rate allow me to take
If a company is growing rapidly, you need to put any
profits in the business and limit your salary. If you have a R12 million business
that’s poised to become a R24 million business, it needs every bit of the
capital it’s generating.
"Growing businesses are generally cash flow neutral or
negative during their formative stages, and as a result, there’s no cash to
take out,” says Douglass Tatum, associate professor at Middle Tennessee State
University. "The entrepreneur has to reinvest into the business.”
5. Can my family afford to live on a small income – or
even no salary?
Young entrepreneurs with no dependents can more easily
limit their living expenses than those with children or other dependents,
Farre-Mensa says. This is why many first-time entrepreneurs choose to start
their businesses when they have fewer responsibilities.
But if you happen to be an entrepreneur with dependents,
make sure that your co-founders and early employees understand your
circumstances and don’t interpret your salary as a lack of commitment to the
4. Can I receive some of my compensation in a form
other than salary?
Once the business is on its feet and the owner is able
to start taking money from the business, the structure of these payments can be
important from a tax perspective. If during the start-up days, the owner loaned
the company money for working capital, he can start to pay himself back when
cash flow allows, Trojan says.
"Making payments to owners via shareholder
distributions – if the company is an S-corporation – also can reduce taxes, but
you have to be mindful of the tax requirements that active owners must take a
reasonable salary.” While the tax man has not defined "reasonable
compensation,” a common definition is a wage you would pay another person for
the job you are performing, he says.
3. Should part of my salary be based on the
distribution that other investors share?
There can be some serious conflicts with investors and
shareholders over compensation, but these issues can be minimised if a
significant portion of the entrepreneur’s cash compensation is based on the
company’s performance, Tatum says.
If the company has professional investors, they’re
going to make sure the compensation plan rewards the founder’s performance
appropriately, with anything leftover going back to the investors. If the
investors are friends and family, they should be given the same courtesy, Tatum
"In other words, treat them as if they had
appropriately negotiated their investment positions as professionals. This
could significantly reduce some of the tensions around the issue of
compensation. This is a good idea even if the investors are unsophisticated and
have not pushed the issue with the entrepreneur.”
2. Do tax considerations enter into my compensation?
Tax evasion is obviously illegal, but tax avoidance is
good business, Tatum says. A good tax advisor can develop ways for an
entrepreneur to increase or defer compensation in a tax favourable manner. Be
sure to consult with a SAIT tax professional sooner than later.
"More times than not, an entrepreneur shows up at the
last minute with ideas for his accountant, and it’s too late to implement them.
A little bit of thought ahead of time can save a lot of money.”
1. Have I put down in writing what I expect to be
It’s critical to document compensation agreements when
you have to answer to other people – whether business partners, a board of
directors or investors. "If you’re at a board meeting and someone says, ‘You
should get 10 to 15 per cent of the profits,’ ask them if they mind if you put
that in writing,” Chapman says.
"Write it down, get it notarised and file it, so there
are no questions later. The clearer you are about money up front, the better
off you will be on the back end.”