What should an owner pay themselves?

You may have heard the rule of thumb: pay yourself 5% of revenue. But that falls apart quickly. It does not work for small businesses or very large ones.

There is a better way.

You Are Not Free Labor

Too many owners underpay themselves. It’s part of the grind, trying to make payroll, buy equipment, and get the company off the ground.

Eventually, this becomes old or turns into a bad budgeting habit.

You are actually doing the work of many roles (sales, production, HR, administration, and more), but your contribution does not get properly accounted for.

If the company would have to pay someone $90,000, $120,000, or more to replace the work you are doing, that cost belongs somewhere in your business model.

If it is not built into your overhead and pricing, you are not just underpaying yourself—you may also be undercharging your clients.

Owner-operators should be paid in two different ways:

• Salary: Paid for the role you perform in the company.
• Owner’s Benefit: When the company produces profit after paying you fairly, you should receive a return on investment after setting aside money for reinvestment, growth, taxes, and other needs.

It’s best to keep those two amounts separate so the management books are easier to track. Remember: your salary, vehicle, and standard perks are not part of your owner’s benefit.

The Head Garbage Is Real

If your company only makes money because you are working for low wages, then you do not yet have a true business.

Some owners feel guilty paying themselves properly, especially when they follow open-book management. They are afraid to share their true pay with their team.

Don’t let head trash get in the way of your proper compensation.

Do Not Starve the Company Either

While some owners take too little, others take too much.

A growing company needs operating cash, working capital cushion, and reinvestment in order to grow.

When you drain the company’s coffers at the wrong time of year, you weaken the very machine that creates your future income.

Example: Years back, an owner complained to me about never being able to afford investments for growth. He paid himself $250,000 (about $350,000 in today’s dollars).

He insisted he needed that standard of living. He could have made a short sacrifice to get over the hump and invest in the next stage of growth. But he didn’t.

In the end, it’s up to you to decide what kind of business you are building.

Your Challenge: Identify Your Two Pay Buckets

Write down every role you currently fill and estimate how much of a full-time position you are covering. Then assign a fair market value to that work.

Now compare that number to what you are actually paying yourself.

If there is a gap, consider adding it to your budget and overhead calculations, depending on how fast you are trying to grow.

Then decide how much you can take out and set aside as owner’s benefit.

Advanced Thinking

Most owners pay themselves through distributions because their accountant tells them to save on taxes above all else. But it muddies the water.

Yes, it’s needed when you are bootstrapping, but I would challenge you to simplify your approach at some point. Pay yourself a proper salary, pay the nominal taxes, and run clean books with proper overhead and predictable cash flow.

No one (not even me) wants to give the government extra money. On the other hand, it will force you to make harder decisions and set up your company for greater success down the road.

Either way, be accountable to your numbers and what they are telling you—and you will go farther.

Go get ’em,
Jeffrey Scott

P.S. Want to work through issues like owner pay, profit, cash flow, and growth alongside other successful landscape owners? Join us at the Summer Growth Summit.