2009 Small Business Guide
small business
The pros and cons of forgoing a salary

At many large companies, executives are suffering small pay cuts because of the recession. For numerous small-business owners, it's worse. They are taking no salary at all.

The number of small-business owners reducing their salaries severely, often to zero, is up 60 percent to 70 percent over last year, says George Cloutier, chief executive of American Management Services, a consultant for small businesses.

"They've also borrowed to the max on their credit cards and 401(k)s, used up their home equity lines and most of their savings, which is one of the hidden drags on the economy," he says.

An American Express survey of 727 small-business owners conducted earlier this year showed that 30 percent of them have stopped drawing a salary.

"This is a real issue now," says Nicholas Robbins, a lawyer who is chairman of the Angel Investment Forum of Florida.

When sales fall off a cliff

Chuck Cheskiewicz, owner of DeadSolid Golf, which makes and sells golf simulation sets, stopped taking a salary last July. The sets cost $25,000 to $45,000, are about the size of a racquetball court and are sold over the phone and Internet.

Given the price of his product and the fact that it's a luxury leisure-time item, the recession has put a huge dent in sales. The Pennsylvania company's revenue has dropped about 80 percent over the past 12 months compared with its best year, 2005.

"Last year, sales fell off a cliff in the summer, when the housing market went down, and people couldn't get home equity loans to go out and buy our equipment," says Cheskiewicz. "We were a direct casualty of the housing crisis."

Working without salary has enabled him to maintain three workers on a part-time basis -- the company's staff once totaled 10 -- to help Cheskiewicz take orders and send out the sets.

"I'm in a cocoon mode, where I'm just waiting for the housing crisis to turn around," says the 51-year-old, who earned an MBA at the University of Pennsylvania's prestigious Wharton School.

Experts see pros and cons to small-business owners like Cheskiewicz working for free. "The ultimate pro is you keep the business going," says Robbins. "The ultimate con is that you don't get paid."

The positive take

On the positive side, forgoing salary allows an entrepreneur to reinvest revenue from the company's business operations into "value creation" for the business as a whole, says Rich Sloan, co-founder of StartupNation.com, a Web site offering help for new enterprises.

"That leads to a more vibrant business that will ultimately be able to pay you a salary," he says. "I also think that if other workers at the business know that you as an owner are making the ultimate sacrifice to invest in the business and preserve their job security, that does a lot for employee loyalty."

Sloan is paying himself a salary below the industry norm to inspire his workers. He sees his payoff coming as his ownership of the firm gains in value. "My win will be in equity," is how he puts it.

Chris and Natasha Ashton, owners of pet health insurance company Petplan, shunned salaries for about six months after the couple started their company in 2003.

"If you believe in the business, then salary is the last thing you should worry about," says Chris Ashton. "Salary is nice to have to pay bills, pay rent and feed the family. But at the end of the day, you have to believe in a bigger vision for the company."

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