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How much should you pay yourself as a business owner?

How much should you pay yourself as a business owner?

We’re British. We’re awkward. Conversations about salaries are difficult and emotional – even when that conversation is about understanding how much to pay yourself as a business owner, but it's a conversation you need to have.

All too often, when people start businesses, they don’t really think about their own salaries – or don’t know how to think about them. But deciding what you’re going to pay yourself is a vital part of a business, and failing to do this can lead you to some serious problems.

In this blog post, I'll give you my point of view, as a small business owner myself, so you can perhaps understand how to pay yourself.

Some key considerations before you set yourself a salary

First, there are two ways to pay yourself:

  • By getting a fixed salary each month like all your team members and making it part of your on-going costs
  • By distributing business profits throughout the year, making it easier to change the amount you get depending on how profitable the business is

The way you decide to do it is entirely personal, but there are different tax and business cash flow implications depending on how you do it, so that's something to take into account.

How should I decide how much to pay myself as a small business or startup owner?

Obviously, every company is different – so we can’t give you any exact numbers here. But there are some basic rules you can stick to.

  • If your business is a startup, aiming at rapid, continuous growth, probably funded with venture capital investment, then the rule is: your salary is there to eliminate financial worries – not to fund a lifestyle.
  • If your business is built around being consistently sustainable at a small size, things are a bit different: your salary is there to provide you with a comfortable lifestyle, but it shouldn't be so high that it sparks resentment.

I stand by these rules for the vast majority of businesses – but I also realise they’re a touch vague and philosophical – so here are some more specific things that you should be thinking about if you’re setting your own salary.

What to think about when setting yourself a salary as a business owner

Think about profitability for your business

When businesses start generating a significant amount of revenue, it’s usually time for the person running the business to think about giving themselves a raise. You can approach this by literally running a performance review on yourself. Consider the following questions:

  • How responsible for the uptick in profits was your input?
  • Have you lived up to the expectations of your team?
  • Were the expectations of your team set high enough?
  • How are you measuring up to the rest of the team?

Don’t just produce brief answers to these: take the time to write out your response, and an explanation arguing why your response is legitimate.

Once you’re done, read over the document and, attempting to take as detached a view as possible, consider how much of a raise you deserve. It might be worth doing this exercise with someone else in the business so you can get some honest feedback – choose someone who won’t suck up to you, and who you can trust to be brutally honest about how well you’re doing your job.

This could be anyone in the business, but if you’ve got a board of directors or investors, they’re often a good starting point.

Want to find out more about HR at small businesses and startups? Check out the best HR software for small businesses in the UK.

Think about your own personal life

When it comes to family and responsibilities, there are no definite rules. In principle, your life outside work shouldn’t really impact your salary, but in practice, this is slightly different.

Being unable to provide for people who depend on you is a fast-track to ruinous financial stress – which will seriously impact your ability to run the business, so this should also come into the equation.

What not to consider when setting your own salary

Think about the amount of investment your business got

Startup founders can easily fall into this trap. If your business has received a huge amount of investment, that is not a license to pay yourself sky-high salaries. That money is probably there because you’re tackling a huge project which has some hefty costs attached.

Your “market rate” – ie what other business owners are paid. Employees will often look at the salaries of people in similar roles at other organisations to work out whether they’re being paid fairly. It can be tempting to do this as a business owner – but you shouldn’t.

The people who own a business are not employed by the company. They are the company. Your salary is not there to attract you away from another job. It’s there to keep you going while you work towards success.

Base it on your experience to do the job

In regular jobs, pay differs massively based on your experience with the role – so it’s understandable that people who have started or run multiple businesses might expect a higher salary.

But this is backward logic: more experienced employees are paid more because they’re expected to bring more value to the business.

If a more experienced founder brings more value to the business, that value will manifest itself as the business succeeding – which will (most likely) result in a large financial reward for the business owner.

Take into consideration how some employees are paid more than you

At early-stage businesses, it’s quite possible that you’ll take on employees who are paid considerably more than you. I had this exact experience with one of our early hires at CharlieHR. It’s a daunting, uncomfortable thing to do – but fundamentally, this shouldn’t change how you see your own salary.

At this point, you might be asking yourself “why don’t I just pay myself as little as possible?” This can seem like a smart idea. Maybe you’re trying to squeeze out an extra month of runway or minimise costs so you can point your revenue elsewhere.

However, this is a dangerous line to walk.

Why it’s a problem when business owners underpay themselves

If your salary is so low that you’re struggling to meet basic expenses, you’re going to experience a heavy dose of personal financial stress. This can seriously impact your productivity and demeanour, compromising your ability to lead your team and get your work done.

If your team is aware that your salary is very low, get ready for some more problems.

There’s a risk of inhibiting the ambition of people on your team. The promise of higher salaries incentivises people to push themselves towards progression and promotions – and hearing that the top dog in a business is paid a pittance could undermine that.

Some business owners (often unintentionally) use their own low salaries as a weapon to drive down the wages of their team. They might talk about how little they’re paid, or the sacrifices they’re making, as a way of demonstrating their commitment to the business. This sends a message that other members of the team should feel guilty for having a high salary, or asking for a raise.

This is a problem. Business owners have a habit of forgetting how much skin they have in the game. If their business ends up being seriously successful, they’re going to be reaping massive rewards: money, prestige and personal satisfaction. Given that potential upside, a low salary is a small sacrifice.

Employees, meanwhile, may have some skin in the game – but their main motivation for coming to work each day is receiving a fair salary. In this context, presenting your choice to take a low salary as compared to someone in your team taking a low salary is, at best, naive, and at worst – insulting.

3 key takeaways to set your salary as a business owner

In my opinion, there are three important aspects to consider when it comes to setting your own salary:

  1. Never set your salary to a point where it could be a problem for your business – only do what you can afford
  2. Review your salary (if you've got a set one) the same way you do it with your employees to make sure you stay fair to yourself as well (you can even set yourself to build a career progression framework for yourself)
  3. Take profit distribution as part of you being the business owner, as long as it's not a problem for the business' finances

Don’t take any of this to mean you should pay yourself a ludicrously large amount. Additionally, it’s fine to make short-term financial sacrifices if the business needs it. But you shouldn’t be keeping your salary at a consistently low level.

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