The pros and cons of forgoing a salary
Small business guide
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.”
Small business guide
The negative side
Declining to pay yourself has obvious negative consequences. “Your business exists primarily as a way to generate income unless it’s a hobby or a passion play,” says Sloan. “Obviously you don’t want to find yourself caught on a road where there is no clear path to restoring your salary. If you don’t have a clear path identified, you’ll get off the road, and you aren’t likely to get back on.”
Lawrence Gelburd, who teaches small-business courses at Wharton and is an entrepreneur himself, urges small-business owners to take at least some salary. “I’m definitely in the minority and usually fail to convince people, but if you have too little cash, it’s a negative because you’re busy worrying about your rent rather than your business,” he says.
Unless you are clearly overpaid, forgoing salary can cause multifaceted damage, says Cloutier. “Obviously if you were making $1 million a year, you can suffer a reduction, but you want to value your position in the business,” he says.
“You shouldn’t be working for nothing. It hurts your own personal credit and self-esteem. It wreaks havoc on your family. It really is a signal that something is wrong with your business and has to be changed,” he says.
Indeed, Cloutier and others say that if your enterprise isn’t making enough money for you to draw a salary, you have to examine whether your business model is viable. And you may have to consider whether the business itself can realistically succeed.
“It’s important to determine if forgoing a salary is the result of the economy or a flawed business,” says Sloan. To be sure, it can be quite difficult to objectively evaluate a business to which you have a huge emotional attachment.
“An entrepreneur’s greatest asset is his or her passion,” he says. “But the most common mistake is buying into the hype that comes from passion and emotion for what should be a rational and logical decision-making process.”
Sloan acknowledges the delicate balance between passionate belief that allows an entrepreneur to sacrifice for the short term when success lies down the road and passionate belief that leads owners to stay aboard a sinking ship.
“It’s more of an art than a science,” he says.
When deciding the fate of your business, especially if you are considering bankruptcy or liquidation, consult with other entrepreneurs, accountants and lawyers if you can. They can help you to understand the full implications of your decision.
At DeadSolid Golf, Cheskiewicz is sticking with his business. Once the economy rebounds, he believes his firm will recover. “I think that will happen well into next year,” he says. “Longer than that, I don’t think we can survive.”
One way to save money if you don’t take salary is through barter, Gelburd says. For example, if you’re a computer programmer, perhaps you can do technology work for your landlord in exchange for reduced rent.
If you do opt out of paying yourself, “call it deferred salary,” says Gelburd. “Don’t allocate yourself $1 trillion for running a pizza stand, but track dollars and hours. You may never get it paid off, but at least you’ve measured it.”