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Paying the Boss: 4 Tips for Setting Your Own Salary

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Paying the Boss: 4 Tips for Setting Your Own Salary

By JamieD
Published: October 6, 2009 Updated: February 16, 2011

Setting employee salaries is one of the many responsibilities that falls on the shoulders of a small business owner. It's important to strike a balance between finding the best talent, what each employee deserves, and what the business can handle. But what about when it comes to your own salary? As the owner, setting your own salary can be a tricky task, especially in markets that see highs and lows. Here are a few tips to help you successfully "pay the boss"...

It's not a science.

Remember there are no set formulas for setting your own salary. The best way to go about finding the right salary amount is to know your business. For a small start-up company that hasn't quite found its footing, that may mean going with less. In this case it may be that your salary amounts to what's left over after operation costs are met and bills are paid. For a small business that's shown a consistent profit, you may take a percentage of those profits, or you may set your salary according to the accepted standards for your industry and position.

Tip: It's important to be flexible setting your own salary. You may find that your projections for your yearly salary don't end up working after all credits and debits have been accounted for. Be prepared to make adjustments.

Consider a percentage of profits.

One possibility for setting your salary can be found by assessing your annual profit. It's difficult to choose an exact number if you're not sure what funds are going to be around. If you've been in business for several years, look over your track record of annual profits.

Determine what an appropriate percentage of that figure would be and set that as your tentative salary. For example, if Jon's business profits $100,000 he may take 40% of profits as his salary; therefore setting it at $40,000.

Tip: Most small business owners limit their salary percentage to 50% of profits.

Check out the competition.

As a standard practice for determining any salary, it's important to know what the average is for your industry or field. Another helpful practice in setting your own salary is to know what others in your position are making.
If you run an independent restaurant, it will help to know the range of salaries being paid to owners of successful restaurants in your area. This information will help you understand cost of living factors for your area and what is realistic in keeping your business profitable.

Tip: Always consider your area and demographic. A person running a small business in Washington D.C.
will generally be paid less than someone completing the same work in Memphis, Tennessee due to a drastic difference in the cost of living.

Ask for help.

Even though you're the boss and setting your salary is your decision to make, it's often helpful to seek advice. If you plan to keep your own books, it may be worth it to pay for a small amount of time to go over figures with an accountant. They will be able to help you consider all factors involved, run specific numbers, and help you understand what would be a reasonable salary in keeping the profitability of your business.

Another option is to speak to any lenders involved. If you're receiving loan financing for your business, it may be tempting to try and pay everything back right away or continue to stretch all available cash. Talking to your lender about your salary will help find a balance between maintaining a good standard of living and meeting all the monetary
needs of your business.

Tip: Small business experts in your area are available to help advise owners in all aspects of running a business -
utilize their experience when setting your salary.

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Comments:

I do realize that it is an old post, however couldn't resist to reply. The approach discussed above would potentially work in good economic conditions, during the peak in particular. Even back in 09 when this post was created the job market was horrible all over the country, therefore this approach should be strictly disregarded. This article serves as a self esteem boost rather. Nonetheless, there is no set set of rules on what your salary should be. Good luck. bankruptcy student loans
Excellent Guide - thanks for putting this together. I've trying to decide whether to setup my 2 person LLC to be taxed like a partnership or corporation and depending on that answer, whether to pay a salary or just take money out as dividends, etc. The info above helped point me in a direction that I think I'll take (LLC as partnership).
Thanks for the guide, it does help where business owners often get stuck in finding a 'balanced point' when it comes to rewarding themselves. Taking the percentage route is indeed good. Nevertheless, we still need to put some portion aside as business reserve, just in case of some unforeseen circumstances. Money CampMessage Edited by NicoleD on 11-14-2009 12:23 PM
Amazing advise,thnaks so much
These are excellent advise, when we first set up the online florist (http://www.speakingroses.com.sg), we flew literally blind on hind sight.Message Edited by JamieD on 10-13-2009 10:53 AM

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