Today's NYT had an interesting snapshot about factors affecting entrepreneurs compensate themselves (balancing between a desire to keep cash in the business and, you know, live). Some businesses must use balance sheets to secure financing from vendors, others may need it to keep or attract investors/VCs.
However, an interesting rule of thumb appeared, courtesy of Andrew Corbett, a professor at RPI:
If the business has started to generate some income, the best way to calculate what to pay the owner, Mr. Corbett advised, is to figure out what the job is worth on the open market.
“You want to be true to yourself and to the firm so you don’t want to overpay yourself and you don’t want to shortchange yourself,” he added.
That means looking at what you do day to day and putting your job in one or several categories, for example, sales executive, product developer or general manager. “Calculate how much time you’re working and how much time is spent on each role. Your salary should reflect the work you do.” Ask what it would cost to hire someone else outside of the business to fill that role, he suggested.
The formula he offered includes paying the owner a 30 percent premium over what the open market would pay to cover health benefits and another 20 percent to 30 percent more for the risk. So if a manager or product developer with comparable skills is making $100,000 a year in salary, and that’s mainly what the entrepreneur will be doing, she can expect to pay herself $150,000 to $160,000 a year, Mr. Corbett suggested.
This probably works if the business has revenue, or the market rate in the region isn't buoyed by local living costs, like New York's. Other entrepreneurs quoted in the article essentially said they had to wait to attract investors before they could pay themselves.