Entrepreneurs Need to Start Paying Themselves Correctly. Here’s How
The following article was written by Abigail Ingram, executive director of the Polsky Exchange.
Entrepreneurs and those who work with entrepreneurs know that most do not pay themselves the salary that they would have to pay someone else to do the same work.
The familiar trope of a founder who does not take a salary for the first three years is well known, and even respected as a sacrifice to get a new venture started. This may work well for entrepreneurs with a financial safety net, or those who can reasonably stay on a friend’s couch or otherwise avoid expenses for those years. It does not work for entrepreneurs in demanding financial situations at the outset.
When we dig into salary data for entrepreneurs, we find another problem: the well-documented lack of equal pay between men and women extends beyond employment. Despite legislation and social campaigns, women continue to earn lower salaries than men when they work for someone else. A survey conducted by FreshBooks shows that 70% of women entrepreneurs began their own ventures “at least partly because they faced gender discrimination and the glass ceiling in their previous jobs.” We are not seeing a correction to this problem when women are writing their own checks, however. In our reporting at the Polsky Exchange, a community-focused incubator at the University of Chicago, only 42% of men members paid themselves a salary consistent with industry standards in 2022. Less than 18% of women members did the same.
Research shows that our membership is not unique. According to the same FreshBooks survey: “on average, female entrepreneurs earn (or pay themselves) 28% less than their male counterparts do.” Some experts note that this could be partially attributed to some women starting companies in lower paid professions such as food businesses, childcare, or cleaning, resulting in lower salaries. However, the survey shows that the problem is not corrected even when men and women business owners operate in the same industries.
At the Polsky Center at the University of Chicago, we ask entrepreneurs at the Polsky Exchange to report on revenues, profitability, number of employees and contractors hired, and to indicate if they are paying themselves a fair salary – defined as the amount they would have to pay someone else to execute their job. This becomes a complicated question for solo entrepreneurs in particular, who are often not only developing and delivering the products and services, but are also operating as the company’s accountant, (often unlicensed) legal counsel, marketer, web developer, administrator, and more. Most entrepreneurs balancing all of these functions simply could not find someone else who would be able and willing to execute such a broad and deep range of duties.
We also find that many entrepreneurs have a tendency to add their salary or distribution to their balance sheet last, or to simply take whatever is left over in the business account at month’s or quarter’s end. While recognizing the difficulty of predicting revenue accurately and foreseeing negative financial events that occur in every business, I want to be very clear and correct the implication for business owners operating in this way: You are too valuable not to get paid.
There are many strategies to increase your salary as a business owner; here are three that we’ve seen work.
Make sure the business is profitable.
Businesses should know their margins (the difference between the cost to make the good or provide the service and the cost at which it is sold) and have a balance sheet that shows the current financial state of the company. Multiple online accounting platforms can help with this, including Quickbooks, and they pull information directly from the business’ bank accounts to automate the process.
To increase profitability, businesses either increase revenue, decrease costs, or both. Entrepreneurs may need to increase their prices for some or all of their customers, find new customers willing to pay more, or find less expensive suppliers, manufacturers, or team members. Some work being done by the founder or employees may need to be contracted out. While this initially looks like an expense, a founder’s time is often best spent making sales and setting strategy to reach more customers or new markets. Hiring or contracting should save, not cost, the business money.
Run financials that include the desired salary.
Business owners should start with the salary figure that makes sense to them. With that figure, add it to an income statement to see how much revenue will need to be generated for the business to afford that salary. Adding it as a fixed cost will help with goal setting for sales figures as well.
If the numbers don’t work – that is, if the business cannot make the current model work when the owner pays themself fairly – the business is not profitable. The model will need to be adjusted so they can afford to pay themselves what they need, and preferably, what they are worth.