Consider such factors as profitability, industry standards, location
Setting employee salaries is one of the many responsibilities you have as a small business owner. You must strike a balance between finding the best talent, the salary each employee deserves, and the payroll your business can handle. Setting your own salary can also be tricky, especially in a tough economy. Here are a few tips to help you successfully "pay the boss."
It's Not a Science
Remember that there are no set formulas for setting your own salary. The best way to arrive at the optimal amount is to know your business. For the owner of a small startup 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 set your salary according to the accepted standards for your industry and position.
Tip: Be flexible. 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.
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 will be available. 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 your business profits are $100,000, you might take 40% of profits as your salary, therefore setting it at $40,000.
Tip: Most small business owners limit their salary 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. Knowing what others in your position are making offers another helpful guideline. If you run a small IT support firm, for example, it will help to know the range of salaries being paid to owners of other successful small IT companies in your area. This information will help you understand cost-of-living factors in your area and what is realistic for keeping your business profitable.
Tip: A good source of comparative salary data is CBIA's Executive Compensation Report, which provides Connecticut-specific compensation and benefits information for small-business executives in a wide range of industries and fields. For more information or to purchase the latest report, go to cbia.com and click Store in the left nav bar.
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 from others. If you plan to keep your own books, it may be worth paying an accountant for a small amount of time to go over figures. An accounting professional will be able to help you consider all factors involved, run specific numbers, and help you determine what would be a reasonable salary given the profitability of your business.
Another option is to speak to your lenders. If you're receiving loan financing for your business, it may be tempting to try to pay everything back right away or continue to stretch all available cash. Talking to your lender about your salary will help you find a balance between maintaining a good standard of living and meeting all your company's needs.