As the Owner, Can I Pay Myself Too Much?

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 owner 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.

So 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 company, you should be paid a salary as the CEO. One way to gauge what your salary should be is to ask what would it cost you to hire a CEO outside of your organization to fulfill the role of CEO? But 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.

Let’s say, in our example above, the CEO of the million dollar company is paying himself a wage of 10% of revenue, or $100,000. With this expense, the company should 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. I would counsel the entrepreneur paying himself $250,000 to knock that down $100,000 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, (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 protected] to see if we are what you need to establish reasonable payroll habits that grow your company.