Getting Paid

A Guide to Owner Compensation

Photo by Money Knack on Unsplash

I’ve been informally polling colleagues lately— folks that coach and consult with businesses— about how many of their clients come to them paying themselves a consistent, good-enough salary.

The answers have ranged from a little laugh at my funny joke¹ to “15% max.”

This tracks to my experience: if polled, a few of you might know your salary, compensate yourselves within an acceptable range (but probably ask me if I think it’s “okay”); many more of you will get a shifty, guilty look before admitting that you aren’t sure; promise me that hope to start soon; admit that you move money into your personal accounts when you need to— or, the stuff of bookkeeper nightmares, pay lots of personal expenses through the business and try and convince me that it’s “compensation”. Obviously salary is such a taboo in this culture, an area ripe for complicated feelings.

So if you’re somewhere in the latter camps, first, know that you’re in very good company.

And second, know that while it may sound like the ultimate vanity metric, I don’t ask because I’m hoping someone will flash me with their big salary. I ask about comp because it’s one of the best shorthand’s for how a business is doing overall and to what extent we can trust the numbers. A business with underpaid owners is a business with numbers that rest on various flavors of business quicksand: ghost labor, lack of profit, or a shaky business model. A more obvious health metric like net profits doesn’t mean much if it’s subsidized by free labor.

Long term it also leads to resentment and/or boredom, and most definitely burnout.

So, holy shit, do I want to change these stats!

It might surprise you, however, to know that it’s not the money that’s most important to me.

My deeper beef with slippery owner pay isn’t that you’re not “earning your worth” or some such bullshit, it’s that it let’s structural issues with the business slide.

When owners underpay themselves longterm, they often end up in businesses (especially when they have teams that are appropriately compensated) that feel like massive boulders of obligation on their shoulders. While, subsidizing your business with free labor is demoralizing long term, again my wider concern is that an underpaid owner means the business model is not fully sustainable, and unsustainable business models extract more effort from people. This is the scenario where people end up the most ground down into a pulverized dust of burnout.

Donella Matthews writes about locating accountability in a system; accountability comes in many forms within the ecosystem of a business, and owner comp is one of those points of accountability. What’s more, if you’re going to redistribute profit to your team and to your community, then you’ve gotta figure this out.

“I don’t know WHAT I should be paying myself? Left to my own devices I’d leave a lot of it in the business checking act to generate cash flow for next year. Is there a good ratio or dollar figure I should be aiming for? “

Principles for Owner Comp

As a business owner, you’re paid for primarily two things:

1. What you do. You are paid a salary based on your contributions within and to the business. This is a fixed amount, paid on a regular schedule either through payroll or regular distributions depending on your business set up, regardless of taxation (more on that in a sec).

2. What you own. If your business is profitable, you are paid profit distributions based on company performance; they’ll be variable, even if calculated and distributed on a regular cadence. You might also be paid for your equity if you sell it, but that’s not a regular thing.

Occasionally you might be paid interest if you’ve loaned the business capital at any point— in other words, risk.

Really important: Your salary and it’s tax treatment are separate issues. Most folks do confuse 1 and 2, and one of the culprits is taxes. Depending on your business legal structure and what state you’re based in, you’ll pay yourself either 100% through distributions or via some combination of W2 payroll and distributions.

Set your salary, and then figure out how it should be paid. For example, say you have an S-Corp and set a salary of $100K: your CPA may direct you to pay $60K through W2 payroll, the rest through distributions. You’re still going to think of your salary as $100K and calculate profit distros separately. Don’t let accounting mess with your head here.

Other things to keep in mind:

1. Your salary is part of your business’s overall labor cap or budget. Your labor cap is the total unburdened payroll (no employer taxes, no benefits included) divided by gross income— in other words, your budget for what you can spend on people as a percentage of revenue (Gross Profit if you have COGS). The percentage depends on the kind of business you have, but usually somewhere between 30-45%. More than that, you’re likely short profit or have extremely low overhead expenses; lower, you risk exploiting people².

2. You will almost always make more as a sole owner than if you have business partners. This is because there are fewer resources to go around and more people at the highest pay grade. As a full time working owner, assume you should be the highest paid employee.

3. Not paying yourself on a regular payroll schedule easily leads to either overpaying or underpaying, and that’s going to depend on your personal orientation to money. Underpayers often feel guilty or conflicted about money. Overpayers tend to let their personal lives and expenses overly dictate their compensation, pulling money over ad hoc to cover personal expenses. Both of these are problematic, for different reasons.

4. Rooting around in compensation is an easy way to figure out any gap between what you say you value and what you actually value. Misalignment often tracks to the types in #3: owners that overpay themselves relative to their business capacity in practice usually undervalue the other people in their ecosystem, even if they say/intend otherwise.

5. In a downturn, your salary might very well take a hit, but if your salary is the only place that’s feeling the pinch, you’re most likely avoiding difficult decisions.

6. The bigger your business the more you can make, but also maybe not. I had to really think through this point, because generally size of business absolutely correlates to increased comp for owners— duh, right?— I thought of a couple of “buts” that aren’t really related to size so much as what you do with that size and philosophies around resource distribution.

“But why do I feel so guilty about paying myself?”

What about when you’re not there³ yet?

I’ve just expounded a lot of air on the importance of paying yourself…but maybe you just can’t yet.

And, that’s really normal too.

Almost every one of the hundreds of businesses I’ve worked with have had start up periods where the revenue wasn’t there yet. Or periods where owners shorted their own pay during a tight spot (hello 2020!)

Which is all to say: I want to normalize that we’re not all pulling our ideal, vibrant and shimmering salaries all the time!

It’s okay to have a life partner or family that covers most of your household expenses.

It’s okay to lean on savings.

It’s not okay to accept that as “just how it is”, and not work to do something about paying yourself over time, because, again, the long term effects are corrosive to a business and to your own self.

When you don’t have the revenue or steady cash yet:

Set a Minimum Viable Salary.

Figure out a “minimum viable salary” and pay it to yourself on a schedule. Even if it’s only $100 a week, it’s more important to set a baseline of regularity than to wait until you have more to disburse⁴. Again, you can use the labor cap to calculate and then periodically recalculate this (probably quarterly at a minimum).

If you have teammates: For some contexts, mostly that you have life circumstances that support not drawing a full salary, it will make sense to pay your employees more than you’re making for a period of time— most of your budget goes to others. If that works for you, that’s a thing that happens sometimes.

In other contexts, you’ll need to prioritize paying yourself, hiring carefully until you’ve grown to the point where you can built the team— most of the budget goes to yourself.

The last thing I want to say here, circling back to the accountability bit: for those of us who care very deeply about not following patterns of exploitation, of running oue businesses in alignment with values of care and solidarity, this is a really important piece to pay attention to.

Everyone in your universe should make a good living, and that means you too.

If a light bulb went off or if you feel called out, welcome to the club, almost everyone gets muddled around their pay somewhere along the way (yep, me too!) :) If I didn’t cover your scenario or you’re getting lost sifting through my “it depends” scenarios, please hit reply, I’ll do my best to help. Wanderwell is a judgement free zone.

1. Rest assured, no one’s laughing at you, dear business owner! This was a rueful laugh, borne from wishing we could save all our people from this all too common plight.

2. Maybe you?

3. I’ve sidestepped the complicated question of “how much” intentionally. My best blanket answer of how much to pay yourself is more, but throwing real numbers around depends too much on business model and industry.

4. This also helps with lumpy cash flow— when business income fluctuates wildly, it can be tempting to disburse everything once you finally get paid— crawl through a desert, and stick your head deep in that pool of water! But! If you can keep the money in the business and pay a disciplined salary, that’s part of the path out of a parched/drowning cycle.