Cut Back Owners’ Compensation During Economic Difficulties

When the going gets rough, everybody needs to make sacrifices, even the owners. Here's why.

When business gets bad enough to warrant asking your employees to make some sacrifices, you as the owner had better be prepared to do some belt-tightening of your own. Certainly if conditions warrant such drastic actions as reducing wage rates or eliminating employee bonuses, the first person to take a pay cut should be the boss.

If the staff realizes that the big boss is willing to take a pay cut for the good of the firm, then they’ll be more willing to accept the sacrifices necessary to keep the company afloat. Indeed, it is axiomatic that when a business is healthy, the individual who feeds off it, the owner, will also be healthy. But when the economy is sick and the business is at death’s door, it’s time for fasting, not feasting.

The owner who tries to squeeze too much out of his business for his own personal use will likely wind up killing the golden goose. As a rule of thumb, if economic conditions mandate drastic action, the owners of the business should trim back their compensation to a level that approximates their necessary living expenses. You will have to judge what’s “necessary” for you and your family, but during hard times all of us can pull in our belt a little and live a bit leaner than in the past.

A couple who owned several retail stores, paid a terrible price to learn this lesson. The business had developed into a highly successful operation, and the owners had become accustomed to a lavish and luxurious lifestyle. Every year each of them bought a new luxury car, they took extensive vacations at jet-set resorts, had several houses, and so on.

In good times the business could sustain this lifestyle, but when the economy turned sour it was clearly time for the owners to put an end to their conspicuous consumption. Despite the business downturn, however, our clients continued to draw large salaries. Almost inevitably the business went down the tubes, and the owners had to sell their home and start all over again.

Worse yet, the financial pressures associated with the collapse of the business took a heavy toll on the owners personally. In the end, the business wasn’t the only thing destroyed–so was their marriage.

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