The Reluctant Entrepreneur: Turning Dreams into Profits

WHY YOU SHOULD IGNORE THE “EXPERTS” AND DETERMINE YOUR OWN COMPENSATION

There is a lot of discussion today about how much CEOs should make. As an owner of a small and growing business, you should ignore it. Most opinions on the matter come from “experts” who have never owned a business. They have never been offered a million-dollar-plus salary. And they have never had the opportunity to choose between reinvesting dollars and keeping them for themselves.

Pay yourself a fair salary. Make it equal to what you’d have to pay someone else to do the same job. If you have investors, distribute profits to them as often as you can, but never more than is reasonable. And reward yourself for the extras you give the business.

Want more specificity? My hunch is that the total performance-based compensation provided by a business should be around 20 percent to 30 percent of profits. And I believe that the person (or persons) on top should get about half of it.

One more thing … 

I think your base compensation should be—in profitable years—a fraction of your total compensation. So, if you have a $10 million gross, $1 million net (before performance-based incentives) business, you should be paying yourself a base of between $76,000 and $150,000 with a bonus of maybe 2 or 3 percent. That is your CEO compensation. That would amount to between $95,000 and $180,000.

If, after paying yourself for your CEO contributions, you decided you could afford to distribute a percentage of the profits, you’d get ...