Recent economic conditions have some founders thinking about how the recession might affect their companies, their workers and their salaries.
Limited funding options this year mean entrepreneurs may face more difficulty raising the money they need to keep their businesses afloat. Meanwhile, layoffs have hit Fortune 500 companies such as Netflix, Tesla and Coinbase, and tech startups are also experiencing workforce cuts. Such events have led founders to review their salaries in order to avoid or prevent their companies from incurring losses.
“Every founder is trying to make their money last longer,” Jenny Lefcourt, a partner at venture capital firm Freestyle, told the New York Times.
Last year, small business accounting firm Pilot released its founder salary report, where they asked more than 150 founders across the US about their salaries. The research showed how much founders pay themselves compared to the amount of funding their companies raise. For example, founders paid themselves an average of $96,700 when they ran companies that raised between $1 million and $5 million. The report took into account several factors to determine the salary, such as the number of employees, the location of the company and the costs of the company.
Here’s how startup leaders view their salaries and adjust them in economic downturns.
Salaries send messages to employees and stakeholders
The Founder Salary Report found that 33% of entrepreneurs who responded to the survey were paid between $100,000 and $149,000, while 9% were not paid at all.
Ethan Mollick, an associate professor at Wharton, told the New York Times that the decision to go without salary can feel like a rite of passage for many business owners. He added that these entrepreneurs first wait to see if their businesses will be profitable before rewarding themselves with a fair wage.
However, some experts argue that founders should be paid fairly from the start because it shows their value to the company.
Alice Bredin, a marketing entrepreneur, told Business News Daily in June that entrepreneurs need to pay themselves as soon as they can afford it, or they don’t present a true picture of the company’s financial health to the outside world.
“If you’re not budgeting for your salary, your books aren’t an accurate reflection of the health of your company,” she said. “Without factoring in all the costs, you won’t know if you need to raise prices, market more, cut costs, or make other adjustments that will help your company succeed.”
Some entrepreneurs cut their wages as a precaution
With experts signaling that a recession is looming, some founders may cut their salaries and reallocate those funds to their businesses, The New York Times reported.
The Harvard Business Review found that in times of economic crisis, entrepreneurs looking to cut costs tend to cut jobs rather than compensate. This research is why Lefcourt was surprised to see some founders take significant pay cuts to avoid laying off staff. The decision shows that employers are trying to send a message to their workers that they care about workers’ jobs over their own profits, she told The Times.
For founders thinking about whether they should take a pay cut, Maria Colacurcio, CEO of workplace platform Syndio, told The New York Times that they can seek advice from their investors. After all, they don’t have to make the decision themselves.