Mukesh Ambani takes Rs. 15 Cr as his annual salary, Snapdeal co-founders earn Rs. 46.5 Cr each, Flipkart founders take home Rs. 20 Cr every year, Mark Zuckerberg prefers to pay himself $1 per year and Narayan Murthy earned just Rs. 1 as his annual salary.
So, what’s the right salary of an entrepreneur?
If you are small business owner with few or even no employees then it becomes very simple to decide what to pay yourself as a salary. But in the fortunate circumstance of you having your business grow, or having a bigger business to begin with, or are in the process of acquiring a new business partner you will need to find how much you can actually pay yourself.
Going about setting your own pay can be a daunting task if not done right. This is even more true in the markets where in lots of fluctuations are seen.
Why you should draw a Salary as a Business Owner?
The main reason why business owners should pay themselves a fixed salary is to regulate the amount of money that is withdrawn from the business capital as a whole. If you don’t fix a set amount as your salary, then you won’t be able keep track of your business expenditure as effectively.
Furthermore once you pay yourself a fixed salary as a business owner, you will be further motivated to run the business smoothly while keeping up with self-appreciation. Such intangible factors is a great motivator for small business owners.
No Standard Formula for setting your salary as a Business owner
Just like any personalized task, setting your own salary cannot be achieved through a standard formula. You will have to play around with certain variables such as business capital and business overheads.
If the business in question is still a fledgling start-up then the salary will be more or less whats left after breaking even each month with the bills paid and the sales made. If the business has continuously shown profit, then it is reasonable to earmark surplus profitable earnings as part of your self-pay. But this is to be done in tandem with industry standards.
You will eventually have to book an accountant or a tax attorney, or both to regulate what you are paying for yourself. This is because the legal structure of your company will dictate the pay structure to a certain extent. The thumb rule is to avoid taking too much of a percentage of the total business revenue as your pay. What is reasonable can be arrived upon by the accountant.
The main logic here is to focus on the growth of your business into the future and not to be worried about your current take home pay which is inconsequential in the long run. You should also be prepared to be slightly flexible when required in situations like when the cash flow is restricted or when the markets are down.
Set a Salary as a Percentage of Profits
You will need the help of a business analyst or someone similar to provide you with a fairly accurate Business forecast. This will enable you to view business growth projections which also include revenue projections for the years to come. Once you have the figures down, for example, your projected business costs, taxes, growth plans, expansion and or merger costs, you can begin to set a baseline for your salary. Most small businesses limit their salary percentage to 50 percent of profits.
If the business you own hasn’t crossed the start-up stage, you will need to just review your personal costs and a few small business overheads to arrive at a number for your salary.
Scope Out the Competition
One fail safe method to calculating the baseline income for your particular industry is to look at what the competition is paying themselves. There are websites for every country that is maintained by the government which maintains baseline salaries for businesses large and small and also board members. The point in this activity is to find out the average salary being paid under similar circumstances.
Factor In Employee Pay and What You Give Your Business
Remember that the time you invest in your business may vary considerably from the hours of your key employees. And while you don’t want to overpay yourself, don’t limit your salary because you feel that your hourly earnings are more than your number two employee. This is your business, after all, and while you may be investing 50 hours one week, you may put in 65 the next. So your salary needs to reflect the elasticity of your time investment. So if you’re using your hourly commitment to help determine your pay, make sure you account for the extra hours when you do your calculations.
Seek Advice
Now that you have hired an accountant and lawyer, or both you might think that the job is done. In fact that is only a part of what you are supposed to do. The next step is to attend investor meets to interact with business owners large and small to hear from another business owner’s viewpoints. Networking at this stage is essential leading to better decision making ability since you will have an unbiased opinion about your salary setting task.
There are also several government run organizations for every industry to help you out with tasks such as these.
Methods To Set Your Salary:
There are two equally valid methods for computing your market worth:
- Open market value.
You will have to factor in your experience and your skills and ask yourself, how much another employer would pay you for the work you are currently doing with your existing experience and skillsets. This is what is called as your open market value. You can also use the salary you were raking in before you started your own company as a benchmark, and set your salary reasonably. - Comparable companies.
As mentioned earlier, you can draw up a list of companies with same business size and costs, to get salaries which are comparable, while checking with trade associations in your specific geographic region for guidelines on employee compensation and benefits. The latter task will give you clear specifics and numbers while the former will give you a broad view of what can be done.
- Periodic Withdrawal
You can set up an auto withdrawal on your business expenses account to automatically debit a certain amount and credit it to your personal account. This is how to set up periodic withdrawal for your salary as a business owner.
This method is of course possible after you have already set up a percentage of the business expenses as your own salary. This is will ensure timely credit of you salary as a business owner into your personal account.
More Methods To Set Your Salary
Both the above methods do not take into account the extra work and proportionate risk you will be taking on as a budding entrepreneur. Some business owners give in to instant gratification and increase their own salaries by 3 to 5 per cent to offset the work and risk they are taking on as a surplus.
Some other business owners will take intangible compensation factors into account, such as the prospect of owning a multi-branched business in the coming few years.
Once you have arrived at a number for the salary that you think you deserve, you will have to weigh your salary against your business finances. You will also be required to check the projections for cash flow in your current business plan to make sure that your operating expenses are met and at the same time so are your personal expenses.
Also read about the Salary Factors you should consider.
Practical Realities of Business Owner’s Pay
In an optimal scenario the cash flow that your profits will create must be big enough to pay a salary that will amply support you while having enough funds to invest back in the business for expansion and also in the end, some room for financial error. This is however a very idealistic scenario which very rarely happens. Usually start-ups operate at a loss and just aim to break even with their expenses for as long as several months or even two years. It is because of this reason that you should always consider starting from the minimum salary range. You can inch towards a reasonable market worthy salary as and when you break even in your business and seem to keep growing.
A detailed way to bring in the above mentioned salary would be to augment (and not completely revise) your basic salary with a bonus that can be structured around the breakeven point in your business expenses and the surplus profits therein.
But while your aim may be to reach your market-worth salary rapidly, it’s a good idea to leave some profits in your business as a safety net and to fund future growth.
When the time comes that your business reaches sustainable profitability, you will have to sit down and evaluate your salary from scratch again. Usually this refers to setting your salary hike as equal to the annual growth rate of your business. After this you will have to reinvest remaining profits into expansion activities. But the golden rule here is customization, if you set your bonus as applicable to your current domain and industry you can do no wrong! For instance, if you are in an unpredictable industry you can go ahead with the bonus structure which kicks in quarterly. Alternatively if you are sure of your business’s rapid growth you can forego the bonus to invest in sure-fire marketing initiatives, new products and even broad expansion plans. This will lead you as a business owner to reap much higher returns in the near future.
Whatever you decide in the early phase of your business, plan to reassess your compensation every six months. As your business evolves, its cash-flow model and capital needs may change dramatically—as would your own. A regular assessment enables you to adjust accordingly.
Final Thoughts
The Salary of a business owner is entirely contingent upon the growth potential of the business. If you are sure of growth of the said enterprise you are better off investing in the business and waiting out a slow market period to emerge a market leader according to the reach of your business.
If you plan to grow it only to sustain a limited business size without much expansion than it would be advisable to slowly give yourself increments in pay keeping yourself financially well-supported on a personal level.
Also Read:
How to record owner’s contribution in business
20 Tax saving tips for a business owner
How to separate your personal and business finances
Tips for maintaining healthy cash flow in your business
Top 12 FREE Software For Small Businesses
