By Karen E. Klein Q: I'm starting a professional-services firm. How do I determine my own salary?
A: Truth be told, if you own the company outright and are a sole proprietor or have an S-corporation, you can pay yourself anything you want. Many entrepreneurs take 100% of the profit generated by their firms. Others, particularly those in startup phase, do not take a regular salary until they reach profitability -- and may even forego a competitive salary for several years while they reinvest heavily in their businesses.
In general, when outside investors are involved, it is rare for owners to pay themselves more than 50% of the profit, experts say. And in a C-corp, you could run afoul of IRS rules against unreasonable compensation if you pay yourself considerably more than the industry average.
Consult your accountant for a solid figure based on your own financial data, but as you get started, you probably will want to set your salary in proportion to your company's sales volume and profitability, and in line with your geographic region and your industry.
GO FIGURE. In order to compare your salary with others in your business, you can use annually published salary surveys for CEOs, looking for data broken down by sales volume, industry, and profitability, says Mae Lon Ding, president of Personnel Systems Associates in Anaheim Hills, Calif. The more specific the figures you use, the better your comparison will be.
"Another important factor is geographic location, because salaries in small towns will be much lower than in urban areas," Ding says. Aspen Publishers does an annual salary survey published online and in book form called The Officer Compensation Report. The study, which lists salaries for the top five jobs in private companies across eight industry groups, costs between $475 and $675 and draws data from 1,000 companies whose annual revenue ranges from $2 million to greater than $100 million. Western Management Group has similar data available in a similar price range.
Free information is available at places like JobStar.org, WageWeb.com, Salary.com, and BusinessWeek Online's own Small Business site. Most of these sites give you national salary ranges if you plug in your zip code, profession, and job title.
PAY SCALES IN PEORIA. If you are in a small town, however, you may have trouble finding comparative data, Ding says. "Unfortunately, there are no data for many small towns, because survey companies can't make any money surveying them," she says. If fellow local-business owners agree that regional data would be useful, she suggests that your Chamber of Commerce sponsor its own salary survey, hiring an outside firm that will honor requests for confidentiality.
Remember, too, that salary data may be skewed, because many business owners prefer to take from the company only what they need to support their lifestyle. A company car, a nicely decorated office, and the ability to entertain clients regularly are all legitimate ways for a business owner to spend company money without commanding a large salary and dealing with the payroll and income taxes that go along with one, Ding says.
UP, DOWN, ALL OVER. In fact, because entrepreneurs enjoy the freedom to determine their own salaries, compensation varies widely and they are more frequently underpaid or overpaid than their wage-earning counterparts, studies show. While the median earnings of the self-employed are virtually identical to employees' median earnings, small-business owners are both more likely to be at poverty-level income and more likely to be at high-income levels than are wage and salary earners, according to a 2000 study done for the National Federation of Independent Business.
Successful small-business owners do not always have significantly higher incomes, but they control greater assets than do employees because of their return on investment. In general, however, most small-business owners -- just like most working stiffs -- are middle-class. Have a question about running your business? Ask our small-business experts. Send us an e-mail at email@example.com, or write to Smart Answers, BW Online, 6th Floor, 2 Penn Plaza, New York, NY 10121. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.