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Published 06 January 2012 15:19, Updated 02 February 2012 05:16
The annals of popular culture attribute the saying “Greed is good” to the Gordon Gekko character in the 1987 movie Wall Street. This may be a good mantra for some facets of your business, but it should not underpin what you choose to pay yourself, the founders of start-up companies say.
When deciding on the right time to start drawing a regular salary and how much, the co-founder of audio-visual equipment rental company Scene Change, Ian Whitworth, has advice for entrepreneurs. “Don’t get too greedy,” he says. “Particularly if you are leaving a well-paid job in the corporate world. You’re just going to have to adapt to having less money.”
Looking at responses from the 2011 BRW Fast Starters survey, more than one in three founders of the fastest-growing start-ups in the country pay themselves less than $100,000 (see table, right).
Tracking salary packages offered in online job ads over three months, MyCareer reports that the average Australian salary is $102,876. Considering that founders often come from management and professional roles, many are taking a pay cut to get their enterprises off the ground.
A plucky 21 per cent of Fast Starters founders are paid more than $200,000; of these, 12 per cent indicate they are paid more than $300,000. About 12 per cent are paid nothing or less than $50,000, placing them well under MyCareer’s average and under the Australian Bureau of Statistics’ national yearly average full-time adult earnings, including overtime and bonuses, of $71,810, which is based on income tax returns.
How much to pay yourself and when is a good time to draw a regular salary can certainly be grey areas. Many founders aren’t sure exactly why they decided on their level of pay, or why they decided to begin drawing a regular amount when they did. They just did it.
About one-third of founders (34 per cent) started paying themselves from day one, while 72 per cent were being paid within the first year. About 4 per cent still don’t draw a regular salary, instead relying on dividends and other income.
Despite the trial-and-error approaches to salary decisions, many founders see positive and negative consequences of their decisions and can extrapolate some advice for entrepreneurs.
Taking a conservative salary from day one can help to motivate the team, the managing director of Fonebox Group, Jordan Grives, says. The small company, which turned over about $1.5 million last year from the provision of 1800 and 1300 numbers that help brands track their marketing materials, works on a policy of transparency.
Fonebox’s 10 full-time employees are “across the finances and business as a whole”, Grives says. “Especially in our accounts team, they’re able to see what’s going in or going out.” If the executive team, which includes Grives’s parents, were to take exorbitant salaries, it would cause the staff to feel that Fonebox wouldn’t grow further, he says.
“We feel guilty if we’re taking a lot of money out of the business,” he says. “We’ve decided not to have as large a salary now, knowing that in a few years’ time it will be exponentially larger than it is now. Or so you’d hope.”
Scene Change’s Whitworth, along with joint managing director Peter Kolevas, did not take a salary in the first year of operation. The pair set up the company with local equity partners in each of Scene Change’s four locations.
This arrangement meant the manager of each new location owned a stake in his or her operation, but not the other Scene Change outlets. Whitworth and Kolevas own the parent and stakes in each individual operation.
“Peter and I didn’t want to burn the offices with head office costs,” Whitworth says of the decision not to draw a salary. “It’s amazing how not having a head office is motivating for people starting up their own business.”
Whitworth was still running an advertising business for income and Kolevas lived off savings. “We kept things very lean for a couple of years,” Whitworth says.
The pair are now drawing a salary from fees paid to head office. Whitworth reckons forgoing a salary initially and giving the local offices a “fee-free” period to get up and running “sends a message that we’re in it for the long term”.
The managing director of asset manager Instreet Investment, George Lucas, was able to draw a salary, at the upper end of the range, from day one.
Lucas raised capital straight away from “a private equity type” deal, where a group of investors bought a 100 per cent stake in Instreet and Lucas and the other shareholders took back equity when they hit targets. This allowed Lucas to draw a salary straight away.
Nonetheless, the company “got bashed around by the GFC” and Lucas cut his own salary for a period in 2008. He says transparency within his organisation keeps salaries fair. “You can’t pay yourself more than you’re worth,” he says. “Everyone knows everyone else’s business, but that should be the way it works … People don’t mind other people getting paid more, as long as they think that person deserves it.”
Martin O’Donnell, the director and co-founder of accounting, finance and IT recruitment firm SustainAbility Consulting, says the question of when to draw a regular salary depends on cash flow. With his business partner, Peter Zonnevylle, O’Donnell set up the company with savings and “in the early days it didn’t make any sense to pay ourselves any money because we’d be paying taxes on our savings”.
Instead, the pair waited until the end of the firm’s first year and, after a thorough check of their finances, paid themselves a one-off bonus equal to what they’d earn in salary the next year.
“At the end of the first year, we were confident enough in our cash position and the cash flow of the business to be able to pay ourselves back and give a bit of a bonus,” O’Donnell says.
“From that point onwards, the advice we received from our financial adviser and accountants was that the cash flow was strong enough to warrant paying ourselves an ongoing annual salary.
“During that first year, we had some good opportunities to expand and because we’d budgeted to not draw a salary for year one, we were then able to capitalise on those opportunities by hiring some good guys and expanding the business.”
O’Donnell warns that start-up founders need to be realistic about their personal finances. “You have to be honest about living costs, so that you don’t leave yourself short or put undue pressure on your personal situation,” he says.
“That first year is obviously very exciting but it’s equally uncertain and you don’t want other external pressures when you’re setting the business up, because you need to be completely energised and focused.”
Wai Hong Fong, the 25-year-old entrepreneur behind online lifestyle goods retailer OZhut, took only $1000 out of his venture in its first 18 months of operations. The secret to his scrimping was living with his parents. He also worked one day a week as an
e-commerce consultant for another company.
However, looking back, he would have done things differently. “I could have probably drawn myself a better salary early on because I think it would have driven the business and pushed us harder to make it work,” he says.
“I think the key is to take something out as early as possible. It doesn’t have to be a lot but it encourages you to treat the business properly.”
With that advice in mind, it might be fair to heed another quote from the fictional capitalist Gekko: “What’s worth doing is worth doing for money.”