You work long days, think about your business constantly, and feel like you’re on call 24/7. You love what you do, have a big vision for your business, and are committed to achieving a much bigger level of success. But there are days when you feel burned out and wonder if the sacrifices you’re making are worth it. You wonder if you’re paying yourself enough – and this article explains how you can know for sure.
To reach a definitive answer about whether you’re paying yourself enough, it’s essential that you separate yourself from your business. You must remove yourself emotionally from the equation and approach this question as if you are an employee. There are two questions to ask:
- If this were not your business and you had to hire someone to do your job, what would you have to pay that individual?
- If you weren’t working in your business, but instead had to get a job with another company, what would you expect to be paid for the work you do and experience you bring to the table?
The best place to start researching the going rate for salaries are websites such as Glassdoor, Indeed, or the Bureau of Labor Statistics. These sites provide a salary range for the job or position title specified.
Enter the position title that most closely matches what you spend the majority of your day doing and/or and the type of job you would be pursuing in the marketplace. For some business owners, Chief Executive Officer is the appropriate title for which to search. For others, the title would adjust if they were employed outside of their own business. For example, the owner of a marketing agency would more accurately be described as a marketing manager, marketing director, or Chief Marketing Officer.
Once you’ve zeroed in on the appropriate position title, specify the location of your current business. Salaries can vary significantly in different locations across the country. On some sites, you may be able to further specify the size of business. If not, recognize that smaller companies will pay the lower end of the salary range provided, and bigger companies will pay near the higher end.
Now that you have a salary range in hand, you’ll know what salary you could command on the open market. You should be paying yourself something in this range. You also have a better idea of what your business should expect to pay someone to replace you.
How Paying Yourself Enough Can Impact Your Business
If your research reveals that your company is not paying you enough, it’s time to arrange your business so you receive the salary you deserve to be paid. But you must be aware of how a pay increase will impact your business. You may well need to generate more revenue. You may also be able to adjust the mix of other expenses.
For example, let’s say that your research identified that you should be earning $250,000 a year, but your business is paying you only $125,000. To bring your salary in line with what the marketplace says you should be earning, you need to pay yourself an additional $125,000. With taxes and benefits, the real cost to the business will be $160,000. If your company’s Gross Profit Margin is 50 percent, this means you need to produce $320,000 in extra revenue to pay yourself what you deserve.
How will this change impact your bottom line? Let’s say that your Net Profit will drop from 10 percent to 8 percent. Compare your new Net Profit to the standards for your industry. If Net Profit will still be equal to or greater than the industry’s average, the increased salary is safe to pay. If it’s not in alignment, however, then it’s time to figure out what adjustments need to be made so that you can pay yourself properly while still meeting industry averages.
For example, you could adjust the Gross Profit Margin by increasing the sale price of the products or services you’re selling. You could also find ways to reduce the Cost of Goods Sold and/or operating expenses to make your Gross Profit and Net Profit consistent with industry statistics. Remember, you want to meet or exceed industry standards. You do not want to fall below what others in your industry are doing.
How to Take Money Out of the Business
Also consider your company’s legal structure, which affects how you take money out of your business – and how much flexibility you have in doing so.
If you own a C corporation, most of your compensation should be paid as salary, with some compensation paid as benefits. All of your compensation will be reported on your W2 at the end of the year.
If you own an S corporation or other pass-through entity, at least 35 percent of your compensation should come from salary. The balance should be paid as distributions.
The benefit of paying compensation as distributions is that you do not pay the FICA tax on distributions. FICA is composed of two taxes: Social Security, which is 12.4 percent, and Medicare, which is 2.9 percent. The employee and the employee split these taxes evenly, each paying half (7.65 percent) of the employee’s pretax wages as tax.
Can Your Business Sustain Your New Level of Pay?
Once you know what it will take for your business to pay you the salary you deserve, it’s time for the toughest question: Can your business sustain this level of performance so that it produces revenue and profit that are consistent with, if not better than, industry norms? It’s a question of long-term planning.
Someday, you will want to exit your business. Perhaps you’ll sell it. Perhaps you’ll bring in a new person to lead it while you remain as owner. No matter how you might someday dispose of your business, you will need to bring in someone to replace you – and your business must be able to afford to pay that replacement at the level your market dictates. The time to make the necessary adjustments is now. If you wait, your plans to exit your business may be delayed while you take time to create a track record of success later.
What If You’re Earning “Too Much”?
Most business owners realize that they need to pay themselves more. But perhaps you fall into the lucky majority who are paying themselves “too much” compared to industry averages. Is this a bad thing, and more importantly, do you need to reduce your compensation?
If you’re planning to someday sell your company, the potential selling price will be based on your company’s value and what you, the owner, are able to take out of the business. If you’re taking more than market conditions dictate you should be earning, it’s a sign that the business is doing well. Your replacement will either be to continue your practice of taking “too much” from the business or will be able to pay the new CEO a competitive salary and then invest the money saved elsewhere in the business.
The bottom line: If your business is profitable and bankable, you may pay yourself whatever you’d like. If your business is struggling or if your numbers fall below industry standards, it’s time to trim your compensation for the financial health of your company.
The Best Reason to Make Sure You’re Paying Yourself Enough
You didn’t start your business to create a job that leaves you overworked and underpaid. You started your business to build an asset that you can someday dispose of for a significant sum.
When you work long hours without getting paid what you want and what you’re worth, it leads to burnout. Furthermore, if you’re not paying yourself properly, it’s a sign that you’re not taking your business seriously. Use the questions posed in this article to take a step back and objectively evaluate if your business is adequately rewarding you for the contributions you make.
