For small business leaders, deciding to take a pay cut is a big decision. If done properly, it could be a driver of long-term growth. Here's how to navigate this important question.
The CEOs of Apple, Morgan Stanley, Intel, and other large companies have taken pay cuts after a challenging year for the economy. But while executives like Tim Cook maintain salaries in the millions, pay cuts for leaders of smaller companies can push personal finances to the brink. If executed strategically, though, they could also save your business.
The average wage for a CEO of a small to midsize business is approximately $213,020, according to the U.S. Bureau of Labor Statistics. While not as large as the salary of Morgan Stanley’s CEO, that wage is still significant enough to help shore up a company if invested back into the business. The founders and CEOs who spoke with Inc. say they have slashed their salaries 30 percent, 70 percent, and even 100 percent for months at a time for the good of the business.
Of course, pay cuts are nothing unusual for founders. Entrepreneurs often report going months without pay to control cash flow when they first start their companies. Lyft’s co-founders, for instance, went without a salary for their first three years in business.
But if a recession arises, more leaders might soon consider pay cuts, even if their businesses are well established. Here, three executives share advice on navigating pay cuts and being strategic with that sacrifice.
Decide if you will tell your team.
The founders and CEOs who spoke with Inc. took different stances on sharing their personal pay cut with their teams. Caitlin Copple, founding partner of the Boise, Idaho-based public relations and marketing firm Full Swing Public Relations, cut her own salary by 30 percent from June to September 2022. She chose not to share the decision with her team of eight employees. “What I would never want to do is have our employees feel stressed out about our finances because that falls to [my co-founder] and me as the business owners,” Copple says.
But Kent Lewis went a different route. In 2014, his Portland, Oregon-based marketing agency lost five of its largest clients in 45 days. Lewis, the founder and CEO, took a 100 percent pay cut for nine months and asked his leadership team to take cuts of about 10 percent rather than resorting to layoffs. He shared this decision with the broader team and explained why leadership was making the sacrifice.
CEOs should consider both circumstances and the company culture when deciding whether to share. Copple says that because her company launched less than four years ago, her priority remained making employees feel secure and avoiding unnecessary alarm. In Lewis’s case, the company’s obvious dire straits and his own commitment to communication prompted his transparency–which he says was well received. “[The team] just doubled down and helped us pull through,” he says.
Be strategic with the money saved.
Before you decide on the size of the cut and how long it will be sustained, carefully consider both the company’s most urgent needs and your own. Just cutting your salary won’t necessarily save the company, and it could put your financial security in jeopardy. The CEO of a Colorado-based PR firm who preferred to remain anonymous cut her salary by 70 percent during the pandemic to avoid layoffs. But the personal financial burden took its toll. She says that looking back, she wishes she had considered other ways to prioritize spending.
If done right, though, a business leader’s pay cut can provide a crucial investment in the company’s future. According to Lewis, his salary saved the company from a negative margin and bumped them back up to the single digits. In Copple’s case, the money facilitated a senior-level hire and allowed the team to focus on perfecting their new revenue stream.
Ashley Tyrner, founder and CEO of the Boston-based health care and technology company FarmboxRx, pivoted the business from a direct-to-consumer entity to a health care company. To facilitate this ambitious transition, Tyrner took options instead of a salary for a full year. She invested the money in sales and marketing.
“I had one shot to get into health care,” Tyrner says. It paid off: In 2020, FarmboxRx started with $1.7 million as a health care company. It closed last year with $56 million. “It’s been difficult when I’ve had to make cuts, including my own cut. But it has brought us to where we are,” she says.
Have a plan to return back to your full salary.
Once the initial hurdle was overcome or the investment had paid off, the leaders who spoke with Inc. all reverted back to their former salaries. “You need to have a path of when you’re going be able to pay yourself again,” Tyrner says. “You can’t continue at a business that’s just failing.”
Copple restored her salary approximately three months after taking her recent pay cut: She had seen strong Q4 results that reflected the strength of her new hire and new revenue stream.
But before you restore your salary, you may want to take a moment to determine whether that former salary reflects your true worth. This applies to female leaders in particular: Before the pandemic, female startup CEOs earned 0.96 cents for every dollar their male counterparts earned. That decreased to 0.89 cents in 2022.
“Just doing that cost-benefit analysis and really making sure that you’re coming at your pay from a place that feels really authentic and also based in math is the way to go,” Copple says.
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