Sunday, May 29, 2005

How to decide on what to pay yourself

How to agree what to pay yourself is a tricky one... plus it changes as the business develops. See also the 3 Hats principles, which will help you think about how to make decisions.

So.. salary.

First of all, ZERO is not the correct answer. This will mask the fact that the business is not viable (ie won't work). Clearly in the early weeks & months you may pay yourself and the other founders a very low salary - just enough to live, but balance this with a large bonus.

For a CASH FUNDED business

A low basic salary + bonus, where

bonus = (month's revenue - month's costs ) / X for each founder.

This means that if X was 10 and there were 4 founders, 40% of the surplus that month is paid as a bonus in total, leaving 60% to grow the company

This means that there is no argument each month, and when you have a very good month you can pay a very large bonus with a clear conscience.

For a business with INVESTMENT

If you've taken investment, you are expecting to make a loss initially as you grow the company. Therefore the bonus approach above does not work as well. You are also going to have more than just founders that you need to incentivese with bonuses. You need to make sure that your bonuses are aligned with the employees, who have joined early into the life of the business and consider themselves "founder-employees".

You can modify the calculation to it so that any revenue greater than plan, minus costs less than plan gives a a calculation of bonus. But paying large bonuses is probably going to upset investors and you cannot afford to do this for employees as well.

Instead you can go for a revenue target based bonus. Hit 80% of monthly target revenue and the bonus starts. For each 1% of target revenue over this point you pay an agreed % of the person's salary - giving a 20% increase in salary if you hit target - and more if you exceed target.

Make sure you have budgetted for this!!

All bonuses should be uncapped.... more thinking behind this in another blog.


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