How much do I pay myself? Part 1

As entrepreneurs, we are confronted in different ways with the salary issue, both from a psychological and from an operational point of view. Depending on the stage of development of the business, financial realities will quickly impose constraints. The entrepreneur will have to test his judgment and diligence so as not to weaken his company by paying himself disproportionately in regards to the financial capacity of the company. Then comes the question of the evolution of the executive’s salary as the company grows, particularly with the potential arrival of new players in the equation (managers, external shareholders, etc.).

Some important questions on the subject include: can the entrepreneur pay back the salary debts of the past? How can he evaluate the value of his contribution objectively and how can he maximize the benefits of his shareholder status? Want to know more? Read the following…

When you have the luxury of paying yourself

The first question of the entrepreneur’s journey is whether and when he will be able to earn a salary from his business activities. More importantly, he needs to analyze his personal financial needs to determine how much time he will be able to work without a paycheck, or what the minimum wage he will need to meet his financial obligations would be. Of course, if you start your business after your university studies and still live with your parents, your needs will not be the same as they would be if you already have a mortgage and a young family to feed.

Nevertheless, the reality is the same for many and the issues are real: the company may not have the financial strength to pay you for a few years, sometimes for much longer than expected. So, you have to be ready, knowing that you may have to spend all your financial resources on starting the business, growing and developing it, and hiring your first employees.

In short, you need to make sure that the business takes off before you even think about the question of your financial worth in the job market…

When you have no choice but to pay yourself

At a certain point, the first paycheck must arrive, either because you no longer have an emergency financial cushion or because the profits generated are sufficient to cover a salary for you. This is a critical step, but you will not necessarily become an official employee as you may simply pay yourself with dividends, which will cost the company much less.

In my case, I started to pay myself a meager salary in the form of dividends, two years after officially starting the activities of my company, once I had fully exhausted all my personal reserves. This quickly increased the company’s expense ratio and it was necessary for revenues to follow and sales to be the more profitable… This was not my case, and I started losing money when I started to pay myself a salary.

This is the true burden and the reality, and it is only at this stage that we truly become aware of the impact of our decisions on the viability of our business. Ironically, the founder is the key person in the company, so it is obvious that this person should receive an adequate compensation, but the reality is that his contribution will not be recognized for some time. It is presumed that he will, one day or another, be able to pay himself a salary; here I am not talking about adequate remuneration, but a salary, period.

The salary is perceived as an income from the personal point of view, but as an expense from the entrepreneurial point of view; this is a duality that the entrepreneur will have to learn how to handle correctly. Those who fail to balance this act can quickly cause the bankruptcy of their business.

The evolution of the entrepreneur’s salary

The general perception is that an entrepreneur makes a lot of money and is a shareholder of an asset that is most likely very valuable. Not only have I found in my personal journey that people tend to overestimate the turnover and value of businesses, but also underestimate the difficulty that the entrepreneur may encounter to pay himself a salary. Yet the entrepreneur can be broke for a long time before his business becomes profitable, or before giving up and looking for a stable job that pays better!

It is when the entrepreneur decides to sell his business that he hopes to become financially rewarded from the venture. But nothing guarantees that this day will come and that the valuation will be up to his expectations. This is another subject that I will discuss in a future article: the valuation of a small company and how to figure out the REAL value of a company.

After having had to sacrifice a paycheck for years for the benefit of his company, once the entrepreneur begins to see profits build up on the bottom line, how should he consider his own pay? I felt a lot of guilt, especially since I was receiving requests for salary increases from my collaborators who felt underpaid. Nobody cared if I was receiving a salary or not… except me. Nobody told me that it was my turn, that I also deserved to pay myself properly… until the day I met my business “Angel” who wanted me to make it a priority.

As the years go by and the profits accumulate, you have to consider salary growth, but this will reflect several factors, including the involvement of the partners in the decision… which brings us to the next point treated in the second part of this article.

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