Some founders tend to underpay themselves to “help” the company. It’s a trap, though. Here’s why.
There is a lot of press right now about disproportionate compensation for CEOs of underperforming companies. It’s true that it’s a problem–in the public market. But not among private companies.
I work with hundreds of CEOs every year, and rarely do I find that any of them are compensated fairly–by any definition of the term. In almost every case, these CEO-founders could make more money working for someone else than themselves. Why do CEOs of privately owned companies–specifically those who own the majority of the stock–not pay themselves better?
I think they may be buying into some of these big myths about CEO money.
1. “I’m the bank, so I am just taking money from myself.”
If your business is viable after 24 months, it should be able to stand alone as a business–with its own independent financing. If you want to be the bank, then loan the business money and charge an interest rate with a payment schedule. But just leaving the money in the business as working capital, without accounting for it, will give you a false sense of the business financials.
2. “My payout will come once I sell the company.”
One of the due-diligence questions a savvy investor is going to ask is, “What will it cost to run this business if/when the owner goes away?” If the investor can see that you are understating your compensation to artificially increase earnings–and that a replacement leader will cost much more–he or she will adjust his or her calculation.
Your business should be strong enough to pay you a competitive salary and bonus and still yield a compelling profit. If it doesn’t, then it will be of lower interest to a buyer, and you will get fire-sale offers.
3. “My people won’t like it.”
I don’t mean to be harsh, but: Why should you care? First, you built the business in part so that you could achieve the American dream, be your own boss, and reap the benefits of your hard work and risk taking.
Another thing I’d point out: You probably have a hidden mental salary cap–a belief that “my people should not make more than I do.” That little voice, which talks to you during salary review and budgeting time, means that because you make less, everyone else has to as well. Do you think your staff likes that?
Giving Yourself a Raise
If you do decide it’s time to give yourself a raise, be sure to take these steps.
- Get the facts about compensation: There are lots of Internet resources and surveys from executive search firms that can provide compensation comparisons for your company size, your geographic market and industry. Get the information so that you know what’s appropriate.
- Pay yourself a market-competitive wage: Many CEOs pay themselves out of what is left after all the other bills are paid. Don’t. Design your business so that your pay is just as important as the rest of your payroll.
- Distribute profits as a bonus program: Treat your own bonus payouts the same way you would those of anyone on your team. The amounts and performance targets can change, but use the same structure for everyone.
Final Note: Tax Consequences
The elephant in the room in most CEO pay conversations is tax management–because the size and structure of your compensation package will, of course, affect the taxes you pay.
Just make certain that you get great advice from smart people before you write yourself a new compensation plan.