The Reluctant Entrepreneur: Turning Dreams into Profits

HOW MUCH OF YOUR PROFITS SHOULD GO INTO YOUR POCKET—AND HOW MUCH SHOULD GO BACK INTO YOUR BUSINESS?

Sooner or later, you will run into the sticky problem of executive compensation: How much should a CEO/owner get paid?

How much you pay yourself is a difficult and important question for most entrepreneurs. Your answer says a lot about your commitment to your business. It involves such issues as employee morale and company culture. And even if your compensation could be hidden from everyone but you, there is still the all-important consideration of how you should be spending your cash. Every dollar you pay yourself is a dollar you can’t be reinvesting in the growth of your business.

I’ve done it both ways and in between.

Most commonly, you face a dilemma. If you take more money now, there may be less value in the business later. Yet, if you take too little, you will feel as if you’re working for peanuts. And what if something goes wrong and all those retained earnings disappear?

So how do you pay yourself fairly and leave plenty of money in the business to pay for expansion?

Here’s what I recommend.

First, you must figure out what you do and break that down into jobs. If you are the CEO, figure out how much you’d have to pay a CEO to run your company. Give yourself that salary—the same base and the same incentives—but nothing more for being CEO.

After doing that, recognize that there are things you are doing for your company that go beyond what any hired hand, however good, would ...