Setting the size of your paycheck

Nation's Business, July, 1998 by Randy Myers

"The issue is one of internal equity," says Jerry Newman, a small-business consultant and professor of organization and human resources at the State University of New York at Buffalo. "What is the pay of the owner relative to the people who report directly to him? If you look at this issue over time, you see that we've developed some clear-cut and acceptable limits. For example, the highest direct report generally makes about 65 percent of what the CEO or president makes."

Once you bring minority shareholders on board, paying yourself a fair salary is no longer a matter involving only you, your conscience, and the tax authorities. As an officer of a company with other owners, you have a legal responsibility to operate the firm in the best interests of all shareholders, not just yourself

While setting an appropriate salary can be filled with complicating tax and planning issues, accountants and business consultants generally agree on one point: Business owners who make earning a large salary their primary objective are often most at risk of compromising their long-term success.

"I want my clients to be thinking about the business; I don't want them to be thinking about themselves," consultant Lewinter says. "The business has a life of its own, and if the business is taken care of, it will be there for a fairly long period of time. If the owner is thinking about his or her needs and putting himself or herself before the business, the business isn't going to prosper."

Thinking in those terms may mean postponing the big payoff that virtually all entrepreneurs hope to reap.

"One of the big mistakes I see people make over and over again," says Smith of Franklin Covey, "is that the minute they start making some money, they buy big cars and big houses. But egos are very expensive. If entrepreneurs can delay gratification until they are rock-solid, they can then afford those big cars and big houses."

RELATED ARTICLE: The Case Of KRB Machinery

Deciding where to set your salary can be a challenge. Sometimes, however, getting to the right number can require more than juggling tax matters and corporate cash-flow requirements. It can take you right to the heart of how you run your company.

After 13 years as his own boss, Ken Kauffman knew that his salary wasn't what it should be. Sure, his company, KRB Machinery, was successful, even profitable, by most measures. Located in bucolic Wrightsville, Pa., a small town on the banks of the Susquehanna River, the company had become a world leader in the production of machinery used to cut and bend reinforcing steel, or, as it is more commonly known in the construction industry, rebar.

Kauffman had become a world traveler, selling his products to customers across the United States and in Europe, South America, and the Far East. But some of his employees were earning more than he was, even though he was the sole owner of the firm and still the only one signing the personal guarantees demanded by his bankers.

A Sign Of Bigger Problem