Why Paying Yourself Fairly is Key to Your Business Success

How do you know if you’re paying yourself enough or too much?

If you’re a small business owner, or considering taking the entrepreneurial leap, this one’s for you. Let’s dive into one of the most overlooked yet critical questions… are you compensating yourself fairly?

Recognize Your Most Important Employee

Imagine, your business is thriving, your team is hitting its stride, and everything seems to be falling into place. But amidst all the hustle, have you considered who the most vital employee in your organization is? Hint, it’s you.

As the driving force behind your venture, your well-being is directly tied to your business’s success. Fair compensation isn’t just about finances, it’s about sustainability. Without it, burnout is inevitable, and we all know that’s no good for anyone.

Balance Appreciation with Humility

Before we move on, let’s be clear, acknowledging your value doesn’t mean putting yourself above your team. It’s about understanding your unique role in the ecosystem. Fair compensation is just as important for you as it is for your A+ employees.

Start with Paying Yourself Fairly

So, how do you ensure you’re fairly compensated? Start by treating yourself like the star employee you are. Just as you’d reward top-performing team members, you should pay yourself an amount that reflects your contribution.

Too often, business owners fall into the trap of overworking without seeing it reflected in their take-home pay. Wasteful expenses, inefficient systems, or a lack of planning often cause this imbalance. 

Take Breaks, Work Better: Efficiency and Balance

Take Breaks, Work Better is about more than just structuring your workday with focused hours and recovery periods. It’s also a framework for making financial decisions, including how much to pay yourself.

How to Determine What to Pay Yourself

Determining your ideal pay starts with assessing your business’s size and profitability. Tools like Mike Michalowicz’s Profit First method can help you calculate your Gross Margin and determine the right percentage for your Owner’s Benefit.

As your business grows, this percentage will evolve. Delegating tasks and scaling operations should lead to working smarter, not harder, while your earnings increase. However, overpaying yourself early on can jeopardize your business, while undervaluing your contributions can lead to burnout.

Here’s an important note on Owner’s Pay vs. Owner’s Benefit, that will be important for understanding the steps below. Owner’s Pay is your salary, while Owner’s Benefit includes all the personal expenses the business covers for you, including your salary, distributions, etc. Together, they represent the full financial value you derive from your business.

Here’s a quick exercise to get started.

1. Calculate your Gross Margin
   1. This is simply your total revenue minus your cost of goods sold
2. Determine your ideal Owner’s Benefit percentage
   1. Based on a modified version from a study of financially healthy businesses, the following lists the Owner’s Benefit percentage you should be taking based on your Gross Margin
      1. $250,000 gross margin = 50% owners benefit
      2. $500,000 gross margin = 35% owners benefit
      3. $1,000,000 gross margin = 20% owners benefit
      4. $5,000,000 gross margin = 10% owners benefit
      5. $10,000,000 gross margin = 5% owners benefit
3. Compare it to your actual earnings
   1. See where you’re at, then make adjustments and set goals to get to that percentage

Evaluate and Adjust

If your pay feels too low, it’s time to examine your expenses and systems. Are you covering too many costs that don’t add value? Are you leaving yourself with leftovers instead of a fair share? On the flip side, if you’re paying yourself too much, it might be time to reassess your hiring strategy or your overall financial plan.

You Deserve to Thrive

Remember, your business needs a healthy, motivated leader. Fair compensation isn’t just a number—it’s a commitment to your long-term success. No more burnout. Let’s make thriving the standard.