How to Set Your Salary Deciding how much to pay yourself can be tricky. Here's how to determine what you're worth.

By Entrepreneur Staff

Shutterstock

It's your business and your budget -- which means the size of your paycheck is entirely up to you. But while the freedom of setting your own salary sounds great in theory, in practice most business owners find it tough to call.

Should you pay yourself what you need to cover expenses? What your business can afford? The salary you left behind to launch your business?

Your salary needs will depend on your living expenses, financial situation and comfort level with drawing on personal savings.

The first step in planning your pay is to put together a comprehensive list of your expenses. When you've computed your annual personal expenses, divide by 12 to come up with the monthly salary you'll need to receive to keep from dipping into your savings.

Next, you'll need to compute what your salary should be given your knowledge and skills, the time you'll put forward and the work you'll perform.

There are two equally valid methods for computing your market worth:

Open market value.
Given your experience and skills, what would you be paid by an employer in today's market? While this salary won't take into account the additional time you'll put into a startup, the income you're sacrificing to start your business is a useful benchmark in setting your salary.

Comparable companies.
What do the owners of similarly sized firms in the same industry and geographic region pay themselves? To get comparable salaries, check with trade associations, other entrepreneurs in your industry or the local Small Business Development Center.

Neither of these methods takes into account the additional work you'll be taking on as an owner, or the risk you're taking in starting a business. Some entrepreneurs boost market-based salaries by 3 to 5 percent to offset the added responsibilities and risk. Others look at the potential long-term advantage of owning a successful business as compensation for these factors.

Once you know the salary you need and the salary you deserve, it's time to balance those figures against your business' finances.

You'll need to check the cash flow projections in your business plan to ensure that you have enough money coming in to cover your own draw in additional to your other operating expenses.

In the ideal scenario, your cash flow will have a surplus large enough to pay your market-worth salary, reinvest funds in the business and leave a little margin for error.

Unfortunately, that's unlikely. Since most startups initially operate at a loss -- generally for at least six months and possibly for as long as two years -- you should plan to start with compensation within the minimum salary range. You can ratchet up toward a market-worth salary as your business reaches a break-even point and continues to grow.

Because your business income may ebb and flow initially, a base salary with a bonus structure that kicks in when your business reaches the break-even point is usually the best way to handle owner's compensation in an early-stage company. When the business reaches a point of consistent profitability, it's time to reevaluate your salary.

Entrepreneur Staff

Entrepreneur Staff

Editor

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

Editor's Pick

Related Topics

Business News

Airbnb Renter Discovers Hidden Door, Says Police Confirm There's a Secret Unit Upstairs With 'Surveillance': 'A Terrifying Experience'

One bride-to-be was in for a not-so-welcome surprise when she discovered a secret door in her Airbnb rental.

Business News

Taco Bell Wants to Be More than a Late-Night Spot as It Unveils New Menu Items for 2024 : 'A Rebel Brand at Our Core'

We attended Taco Bell's inaugural Live Más LIVE! over Super Bowl weekend. It was as over-the-top as you'd expect.

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.

Leadership

Adapting to Change Is Key to Surviving Every Consumer Demand — Just Ask Netflix, Blockbuster, WeWork and More

Many businesses have closed down because they did not spot major changes and failed to adapt to the new reality. Don't let yours be one of them by learning from history.

Growing a Business

Expand Your Knowledge and Unlock Success With These Must-Read Business Books

Top business books to ignite your entrepreneurial journey.

Money & Finance

Don't Fall Victim to Rental Fraud. Adopt These Smart Practices to Prevent This From Happening to You.

It's easier than ever for scammers to commit rental fraud. Real estate investors must adopt these smart and savvy practices to protect themselves.