You start a business to make money. But, it takes money to make money. Running a small business takes an ongoing investment. If you are both the sole business owner and the sole employee, the situation is simple. You get what’s left over after the bills are paid and the necessary investments are made. As soon as you add employees or investors, though, the situation becomes complicated. Salaries have to reflect market value and the balance of power in the organization—not always an easy thing.
The 2016 American Express OPEN Small Business Monitor looks at pay and other issues faced by entrepreneurs. They reported that the average entrepreneur who takes a salary is paid $76,010. However, only 51 percent of small business owners pay themselves. The research also found a difference between the salaries that male and female entrepreneurs pay themselves. Male business owners are more likely to pay themselves, and they pay themselves an average of $81,060 per year, versus $63,590 per year for female entrepreneurs.
Of course, most entrepreneurs are balancing pay, equity in the business, and total employee benefits. That makes the issue of pay more complicated. The survey found that 39 percent of small-business owners plan to hire staff in the next six months, and that finding the right staff is the number one challenge to growth. For many entrepreneurs, it is better to pay themselves less and employees more in order to increase the value of the business.
A great source for salary information is, which can help entrepreneurs find information about salaries being offered by competitors. The information can also be used to help business partners determine fair salaries for their own efforts.
Erik Burst is the founder and CEO of JonnyPops, a maker of frozen treats based in St. Louis Park, MN. The company was founded by four friends in 2011 when they attended St. Olaf College. Two of the founders remain active in the business. The company now has 35 employees in total. “The first three years were really easy,” Burst says. “We only had to pay ourselves for the summer.” When the founders approached their graduation date and had to decide whether to turn their summer job into a year-round business, they had to make a lot of decisions about pay. The advantage, Burst says, is that as recent college graduates, they had low expectations for their lifestyles. “Once you enhance your lifestyle a certain amount, you can’t go back,” he says.
The challenge came when it was time to add management. People who were interested in joining the company were looking for equity and opportunity as much as for salary, but they also wanted and needed more money than recent college graduates did. Burst says that some of the employees who were brought in made more than he did as CEO. “We had to do it to get the talent we needed,” he says.
Compensation can be thought of as an investment in the business. Not only do entrepreneurs need to be compensated for their time – money goes a ways toward alleviating burnout – but it is also important to be able to spend money to attract folks with the skills and enthusiasm to help grow the business.
That tradeoff between salaries and equity is important. Some businesses will increase in value over time, others won’t. If a business is primarily structured as a job for the founder, then the ownership will have little value to someone else. In that situation, pay is a greater source of return than equity in the business. If the business has a life beyond the founders – to another generation of family owners, to another company, or in the public market – then the value of the equity becomes more important in long-run return.
The Small Business Administration (SBA) recommends that business owners think about salary as a percentage of profits, at least until the business reaches the stage at which it can pay the owners’ salaries that are competitive in the market. It should not be all of profits, because the business will need ongoing investments as well as a cushion. However, the SBA finds that up to half of profits can be paid out to owner-employees, while still allowing most businesses adequate funding for growth.
And, no matter whether you have a sole proprietorship or a company with a hundred employees, you will need to make ongoing investments (computers have a funny way of crashing at the worst possible times). The American Express study found that 75 percent of entrepreneurs have plans to grow the business, and 51 percent have capital investment plans in place. That, ultimately, creates the value of the business and the atmosphere for making a company a great place to work.