3 Signs You Need to Take a Pay Cut CEOs are cutting back on their salaries left and right this week -- from President Obama to J.C. Penney CEO, Ron Johnson. Are you a candidate for a pay cut? Here are three signs you might be.

By Victor Cheng

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Whether it was federal budget cuts, shareholder activism or the 99 percent versus 1 percent debate, CEO compensation has been in the news a lot these days. Ron Johnson, CEO of J.C. Penney, was given a 97 percent pay cut due to poor financial performance in 2012, according to figures released this week. And on Wednesday, President Obama announced that he'll be giving back 5 percent of his salary in response to federal workers being furloughed due to budget cuts.

Taking a cut in your pay can send the message to employees that you are committed to your business and willing to make whatever sacrifices are necessary. If you're a one-man-show, a pay cut can free up cash to invest in your business's long-term future.

But how do you know when it's appropriate to scale back your own salary? Here are three signs it might be time for you to take a pay cut:

1. Sales and profits took a hit.
If your sales and profits have both dropped 20 percent or more in a year, you should consider taking a similar percentage pay cut. This shows outside investors you feel their pain. If you're the sole owner, the pay cut helps to offset the loss in income needed to fund operations.

Since turning around sales usually takes longer than cutting costs to improve profits, you need to decide if the money is better off in your pocket or more useful supporting sales growth. Once sales and profits have both recovered to previous levels, you'll want to increase your pay.

Related: How to Set Your Salary

2. You're adding new products or changing your company's focus.
If you are making changes in your business to better serve your customers evolving needs, it can be worth taking a short-term pay cut during the transition period. Let's say 10 years ago you were an apps software developer for Blackberry mobile devices, when suddenly Apple's iPhone came out. It can make sense to take a short-term loss to fund the development of iPhone apps. The problem is you now have the R&D costs for two mobile platforms, but only revenue from one.

Taking a short-term pay cut now, can help your business fund new R&D investments and enable future sales growth. When the new growth kicks in and the finances improve dramatically, you can give yourself a big pay raise that more than offsets the pay cut. This creates a win-win-win situation for you, your investors and new customers you couldn't have served any other way.

Related: The 10 Fastest-Growing Industries for Small Business

3. You have to cut employee pay, forgo bonuses or layoff people.
When you grow too fast or the economy takes an unanticipated turn for the worst, sometimes layoffs are impossible to avoid. During these belt-tightening times, the morale of remaining employees often gets damaged by forgone bonuses and skipping annual pay increases. In short, it's depressing to be working for a company that's under financial pressure.

If you're trying to convince your staff to hang tight during these -- hopefully temporary -- difficult times, it can help if you're sharing their pain. By taking a modest, largely symbolic, pay cut, you send the message that we're all in this together. It can help people buckle down and work as a team --which is exactly what's needed in a crisis.

Related: 5 Ways to Train Yourself to Be a Great Leader

Victor Cheng

Strategic Advisor

Victor Cheng is a former McKinsey consultant, author and co-founder of Entrepreneur-to-CEO Mastermind, a Seattle-based firm that advises entrepreneurs of fast-growing companies.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick

Related Topics

Business Solutions

Get More Done with ChatGPT for Just $20

This ChatGPT course can help you streamline your business.

Thought Leaders

10 Simple, Productive Activities You Can Do When You Aren't Motivated to Work

Quick note: This article is birthed out of the urge to do something productive when I am not in a working mood. It can also inspire you on simple yet productive things to do when you're not motivated to work.

Business Ideas

55 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.

Growing a Business

Lifetime Access to Business Advice with This AI-Powered Service is Just $29.99

With Consultio Pro, you'll find expertise on topics like data analysis, financial analysis, innovation management, and so much more.

Social Media

How To Start a Youtube Channel: Step-by-Step Guide

YouTube can be a valuable way to grow your audience. If you're ready to create content, read more about starting a business YouTube Channel.