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Bosses: Cap your pay

boss money revenue

It’s tempting. After much sweat and tears, you have managed to get your business up and running. Surely your bank account deserves to start seeing big growth?

While it’s true that the hard work we’ve put in to get our business off the ground warrants monetary appreciation, it’s important to find that limit of self-pay that stops you from eating into the business itself.

Research has shown that companies perform worse the more CEOs get paid. A study from the University of Melbourne found CEOs locking in big paychecks – especially those earning big performance bonuses – could be behind the lack of long-term strategies and an over-reliance on short-term gains.

Dr Peter Cebon, one of the brains behind the research, highlighted the relationship between execs and the company’s board.

“We’ve seen CEO salaries skyrocket in the last 30 years. That is based on an assumption that these high incentives will create the most profitable environment for a company’s growth,” Dr Cebon said.

“This discourages CEOs from pursuing strategies where the results are harder to measure, such as building organizational capabilities, or pursuing high value, high risk innovations.”

Sure, the fact some of Australia’s top CEOs often earn $7-$10 million every year in performance bonuses is pointing to some “big business problems”, but these issues highlight a business problem as a whole – no matter the size.

U.S. research highlighted a similar factor, revealing that the pay a CEO receives “is negatively related to future stock returns for periods up to three years after sorting on pay.” The paper pointed to the relationship between “high-pay related CEO overconfidence” and the subsequent loss of shareholder wealth that results from over-investment and negative acquisitions and mergers.

Big business or small business, one thing is certain: the guys up the top earn the biggest dollars. It’s not rocket science, but the science is behind knowing at what number to cap that pay. This is especially the case with SMBs, those companies with a limited number of resources, internally adjusting pays as best they know how.

Apart from that aforementioned negative “overconfidence”, which trickles down among employees and business affiliates, paying yourself too much inevitably detracts from other areas in your business that needs funding.

If you’ve grown your business yourself, moving from those days as a sole proprietor to running a business with employees and partnerships can be quite the task. Here are three points that may help determine what your wage should be:

– Use professionals: If you are totally lost as to what bit of revenue you should be taking for yourself, make sure you get professional help. An accountant or financial advisor will help you best determine that salary cap and will also come in handy when dealing with those important tax issues.
– Look sideways: While it may not be an easy task, determining what your pay should be can be as simple as looking at your competition. Look what similar businesses earning similar profits are paying their bosses and match it accordingly.
– Revenue percentile: Salaries are often determined by how much profit is being brought in by the business as a whole, so use a similar strategy when judging your pay. Costs, taxes, past performance and revenue forecast should be taken into account.


About the Author:

Colin Porter is the publisher of Dynamic Business and the founder and MD of credit reporting bureau,CreditorWatch. He has over 20 years experience as a business owner, specialising in general small/medium business issues, cashflow, credit management and online business. Follow CreditorWatch on Facebook, Twitterand LinkedIn.