Of course, cheating yourself also cheats your family. John Greene, the president of Custom Transportation Service, in Braintree, Mass., knows the guilt of using family members' personal charge cards to cover payroll. But over the past year Greene's bonus (which is about 5% of pretax income) and his salary combined have grown by nearly 30%. His secret: "If you treat yourself as an employee, and pay yourself properly from the get-go, you can't go wrong."
2. Gouge the company. Sure, there are times when you take a little extra and then there's an unexpected decline in your business. That's only natural; no harm done. But when "lifestyle" issues -- or greed -- got the best of one of compensation consultant Ken Kulesza's former clients, Kulesza, the president of ExecuComp Systems Inc., in Norwell, Mass., witnessed the destruction firsthand. The client plundered his company coffers, which ruined the fiscal year, destroyed morale among the company's 100 employees, and put the CEO in the hot seat. "This guy was always defending his outrageous pay level," explains Kulesza, who adds that such behavior attracts the attention of the IRS. (See number 5, below.) Taking too much out can also put an end to any plans you might have for going public and for going to your banker for a loan or line of credit.
3. Base your compensation on bad numbers. "Last year we were doing great, and in May, suddenly, the business lost $30,000," says Jeff Hopmayer, the president of Original American Scones, an $8-million scone maker in Oak Park, Ill. The inventory count was wrong. Hopmayer gave up his expected raise. His advice to CEOs itching for a raise: "Four months of data don't dictate a pattern. Look at performance over the long haul, and don't be too anxious." Today Original American Scones enjoys 30% gross margins, which Hopmayer suspects will in time allow him guilt-free pay hikes.
Conversely, growth itself can trip up compensation plans. "When a CEO wears all the hats, he or she can watch only so many things at once," laments Bear Barnes, the president of Flying Colors Painting Inc., a $1.7-million company in Norwalk, Conn., that recruits and trains college students to paint houses. "Every six months something scary happens." Like the time Barnes applied for workers' compensation, which required giving his provider a payroll estimate for the year; that year he wound up with double the volume of business he expected, and he expanded his workforce. He had to pay his provider $15,000 for the difference between the payroll estimate and the real thing. That $15,000 had been targeted for his own pocket.
4. Get bogged down too soon with too many fancy benefits. "It's fine to look at what benefits other CEOs at your level provide for themselves and for their employees, but you don't necessarily want to be the market leader in that category," says Diane Posnak, a partner with executive-compensation consulting firm Pearl Meyer & Partners, in New York City. "It's difficult to take away defined benefits, which don't ebb and flow with business success. If you suffer a downturn, you're tied to a fixed cost that's viewed as a take-away." The guideline is affordability.
5. Think the IRS isn't watching. Heads of S corporations have nothing to fear, since profits go directly to the owners, but heads of C corporations may. Although there's no fixed salary- compensation level that will set off flashing lights at the IRS, Bernie Kent, a tax partner with Coopers & Lybrand in Detroit, figures anything above $500,000 is open to questions. "It's difficult for them to prove unreasonableness below that level," he explains.
Beyond that, Uncle Sam keeps an eye on entrepreneurs who take year-end bonuses that are fat compared with their salaries, as well as those who take all profits as a bonus. "Your best defense is to leave as much money as you can in the business," says Kent, who adds that a clear paper trail is a must in case you're audited.
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How Much in Salary? How Much in Perks?
How will you structure your total compensation? How will you weigh the elements you choose? Salary. Performance bonus. Insurance. Cars. Laptops. There are plenty to choose from, but if you have limited resources, you'll want to invest in the portions that deliver the biggest bang for your buck. Which elements have the greatest impact on the business (and lifestyle) goals you've outlined for yourself? How do they change as your company moves from one stage to the next?
As a rule, CEOs of start-ups take a hefty portion -- nearly 80% -- of the total dollar value of their compensation in base salary. That's because they have few, if any, benefits or perquisites in place. "If you're the owner, you may pay yourself more than what company size would normally dictate, or whatever's in the till at the end of the month, as long as you're still in business," says Larry Wangler, a principal of Towers Perrin's executive-compensation consulting practice in Irvine, Calif. "But as you hit breakeven, you want market pay with a modest bonus. You start thinking about a company car, a club membership, profit sharing. You need competitive benefits to attract good people. By the time your company has reached maturity, when you are the head of a professionally managed company, your compensation is much more market driven. It has to be competitive."
Wangler's "best-guess" breakdown of how typical founders who are 100% owners weigh the compensation mix as their companies grow:
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CEO Compensation at Different Stages of Development
An estimate of how CEOs break it down:
Stage of Growth
Compensation Emerging Developing Mature
Base salary 78% 64% 50%
Annual bonus 10% 16% 25%
Benefits 8% 12% 14%
Perks 4% 8% 11%
Noncash Perks Favored by CEOs
In our survey we asked about the noncash perquisites CEOs gave themselves. The answers ranged from newspaper subscriptions to a corporate airplane. Here's a breakdown of some of the more common perks:
Deferred compensation 16%
Club membership 17%
Personal legal advice 18%
Personal financial advice 18%
Company car 31%
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