Owner pay is tricky to navigate. There is no right way to pay yourself as the owner. And there are no magic formulas. But great books like Simple Numbers, Straight Talk, Big Profits give us some guidance as to how to pay the owners of a growing business.
Greg Crabtree, the author, makes the point that “you get paid a salary for what you do, and you get a return on what you own.” That means you are not guaranteed a salary unless you fulfill a job and do work for the company. On the flip side, as the legal owner, you may get distributions out of the profits, if you’ve had a good month. These are not the same thing.
Your salary should be commensurate with the job you are doing. Further, your company should be paying you while still remaining profitable. As an example, if you are the CEO of a million dollar agency, you should be paid a salary as the CEO. One way to gauge what your salary should be is to ask what it would cost you to hire a CEO outside of your organization to fulfill the role of CEO? You must also consider that if your company has sales of a million dollars, what are the profits? You can’t overpay yourself as the CEO and run your company into a loss just because you are also the owner.
Creative service based companies should be paying labor that totals between 50 to 65% in total labor (including contractors and owners’ salaries). Our firm, Blumer CPAs, may change or tweak this metric depending on which organization we are working with, but it’s a solid metric to consider for your total labor costs. If you are tracking higher labor metrics then there may be some inefficiencies your team is experiencing in the production of it’s labor, or you may be paying the leadership or ownership team more than is justified by their role.
As an example, in our example above, the CEO of the million dollar company is paying herself a wage of 10% of revenue, or $100,000. With this expense in consideration, the company should also be showing at least a minimum profit of 10%, or $100,000. 10% is the minimum profitability that companies should be showing, per Greg Crabtree. This is the minimum level of health for any company. 20% profitability is even better.
But what if the owners were paying themselves $250,000 with a million dollars in sales? This could be too high because some of those funds could be used to invest in new team members, new software, etc. When we see owners paying themselves too much, then they are preventing themselves from hiring the right team to do some of the jobs they keep doing for the $250,000 in salary. Sure, the owner/CEO gets a high salary but they may have to work too far down in the weeds of their business to justify that salary because this salary is really the salary of two jobs. When entrepreneurs stay in the weeds, they don’t grow. In our example, we may counsel the entrepreneur paying themselves $250,000 per year to knock that down to $150,000 and then spend the extra $100,000 on a new team member (or tool, software, equipment, etc.) that begins to free up the CEO to remain strategic so the business will grow.
Can owners pay themselves too much? Yes, but they can pay themselves too little as well. It may take some tweaking to get the salary right, but as the owner, make sure you are (1) paying yourself a reasonable market wage that matches the role you are fulfilling for the company, (2) your company is at least 10% profitable, (3) you can pay your taxes at the end of the year, and (4) you are continually moving away from the work of the company as you move into a higher, more strategic position that grows your company.
Need help knowing how much to pay yourself? We can help with that. Reach out to us at email@example.com to see if we are what you need to establish reasonable payroll habits that grow your company.
About the Author
Jason Blumer founded Thriveal in 2010 as a way to help entrepreneurial CPA firm owners connect, learn, and grow. He serves as the Visionary and CEO of Thriveal, and his partner Julie Shipp serves as the Integrator and COO of the organization. Since 2010, Thriveal has helped many small firms grow by providing a community, coaching services, webinars, firm consulting, monthly growth groups, and live events. Deeper Weekend is the annual live event by Thriveal, now in its 10th year.
Jason is also the CEO of Blumer & Associates, CPAs. The firm was one of the first to move from a traditional office to a virtual environment in 2012, where they serve as an advisory firm for the design, marketing, and creative agency services niches. He and his partner focus on business consulting and coaching with the owners and partners of firms and agencies, while their team meets the technical and financial compliance needs of the customer.
Jason is the co-host of two podcasts, the Thrivecast (since 2011) and The Businessology Show (since 2013) and speaks and writes frequently for the financial and creative industries. He has been honored as one of the Top 100 Most Influential People in Accounting (Accounting Today).