How much should you pay yourself as an agency owner? Between US$100,000 and $500,000… but you might hit $1+ million or more in total owner compensation as you grow.
That’s a big range, right? Fortunately, I’ve identified 9 key factors to help you decide what’s right for you—and to check whether you’re over- or under-paid. I also share 10 [anonymized] examples of agencies worldwide. Disclaimer: Talk to your tax advisor; I’m not a lawyer or an accountant.
Let’s begin with a baseline for owner comp…
Owner Compensation: A Baseline for Agencies
Agencies vary dramatically in size and structure, so I’ll use examples from my experience—your role as an independent agency owner with under 100 employees.
In that scenario, an agency owner should pay themselves between US$100,000 and $500,000 a year.
- There’s technically no limit on how much you can pay yourself—but in practice, I rarely see salaries above $500,000. But with distributions, you could hit $1 million or more.
- If you’re currently paying yourself less than $100,000 today—because you started your agency recently, or you’re following guidance from your tax advisor—that’s OK. You can grow your income as you grow your agency.
Beyond salary, you’ll likely owe taxes on annual “pass-through” profits—regardless of whether you take the profits in cash. Even as you take cash distributions to cover taxes, you’ll likely reinvest a portion of profits back into the business.
9 Factors: Adjusting Owner Compensation to Your Situation
In my work, I’ve identified nine factors that impact owner compensation at independent agencies. Consider:
- Agency revenue: The higher your revenue, the more you can afford to pay yourself. If you want to pay yourself $1 million but your total revenue is $1 million… that’s just not going to happen, yet. More revenue doesn’t guarantee higher owner compensation since some agencies grow unprofitably rather than profitably.
- Profit margins: Ideally you’re getting 20-30% net profit margins after paying everyone market-rate compensation or higher. Most agencies operate as “pass-through” entities, meaning the owners pay taxes individually based on the business profits rather than the business paying taxes on profits. The higher your profits, the larger a shareholder “draw” you’ll likely take, to cover the tax bill for your “on paper” profits.
- Co-owners: You and any business partner(s) tend to be the highest-paid people at the agency. More partners mean more owner compensation—leaving less money to pay non-owner employees. In practice, agencies tend to spend 50-60% of revenues on labor (including owner, employee, and key contractor compensation). If you overpay the owners there’s no money left to pay everyone else. And you probably don’t want to do ALL the work yourself.
- Geographic cost of living: Living in New York, London, or Singapore is more expensive than living in a small town or a mid-sized city. You’ll likely adjust your compensation up or down to reflect that reality.
- Full-time vs. part-time: Most agency owners are working full-time in the agency (that is, 40+ hours a week). As the owner, you always have the option to work less than full-time—but you probably won’t pay yourself 100% of your previous compensation, because some of that money will go to pay a successor to do your old job.
- Tax planning: Your tax advisor may recommend a [relatively] low salary for tax purposes—but there are limits to that strategy. For benchmarking, consider “converting” your compensation to a salary-based equivalent to make this an apples-to-apples comparison.
- Personal preference: Owners tend to pay themselves to support their lifestyle expectations, which vary dramatically. Some agency owners have a second home, a healthy travel budget, or annual tuition expenses. Others are minimalists. These choices impact your agency’s growth, recruiting, profits, and quality of life. For instance, consider whether you’re a Maximizer or an Optimizer.
- Sales pipeline: Agency owners with more recurring revenue tend to feel more confident about paying themselves a higher salary. To grow your income, be sure to build your agency’s marketing and sales pipeline.
- Self-confidence: Some agency owners don’t feel they’re worth paying themselves more. Read Overcoming Underearning—and see my future article on “Imposter Syndrome.” In contrast, others might be… overly confident.
So now what? Well, you have some options around how you pay yourself…
Six Ways to Pay Yourself
Once you’ve had a chance to review the above nine factors, it’s time to decide what your compensation should be today—and what you want it to become in the future. You also need to consider the ways the ways you can pay yourself.
Before embarking on any of the below options, get input from your accountant and/or tax advisor first on the right way to structure things for your specific agency and situation. This will help you understand what to increase or decrease, and how to structure things to avoid expensive problems later.
For now, consider 6 general ways you can pay yourself:
- Salary
- Draw (shareholder distributions / dividends, from annual profits and from retained earnings)
- Bonuses
- Commissions
- Benefits
- Expense reimbursement
Schedule a meeting with your accountant… and then meanwhile, consider some [anonymized] real-world examples from other independent agencies.
Real-World Snapshots: Examples from 10 Agencies
It helps to consider examples of what other agency owners are doing. Reflect on these 10 examples, anonymized to remove identifiable information.
- Example A: Grow from $500K to $1MM (including distributions from profits): An Agency Growth Bootcamp applicant mentioned wanting to grow their owner compensation from $500,000 a year to $1 million a year. I noted it would take some time—but since they were growing revenue rapidly, they could continually increase their compensation over time as cash flow grows.
- Example B: Minimalist owner: An agency owner was living a minimalist lifestyle—initially paying himself $40,000 a year in a mid-priced city. In our Executive Coaching work, I suggested he consider at least doubling his salary to help him pay-off their mortgage faster, without hurting profit margins. He followed my advice—and they are now nearly debt-free!
- Example C: $400K in New York: An agency owner in New York paid themselves ~$400,000 annually, a healthy compensation by most standards—but not enormous relative to the cost of living in Manhattan. Their spouse made similar compensation, and their lifestyle reflected their combined household income.
- Example D: £50K in the UK for tax purposes: I’ve met several agency owners in the UK who cap their salary at £50,000 a year, based on advice from their accountant. They are technically underpaid… but then they take distributions to make up the rest. Your accountant can recommend the right combination of salary and distributions to meet your specific needs… without running afoul of the tax authorities.
- Example E: $50K → $75K, after reading a key book: A client was paying themselves $50,000 a year. That was reasonable in the early days, but they were now underpaid relative to their higher revenue and profit margins. Despite this, the client was still reluctant to give themselves a raise. I recommended they read the book Overcoming Underearning to understand why they might be choosing to underpay themselves. After reading the book, they immediately gave themselves a 50% raise (to $75,000 a year).
- Example F: $200K ($100K + $100K), as salary + draw: A client in a mid-sized city paid themselves $200,000 a year through an even split of a $100,000 a year salary plus $100,000 a year as a shareholder draw. They typically take the draw on a quarterly basis, putting a portion of it toward their estimated tax payments to the IRS.
- Example G: $150K part-time work: I often help my clients reduce their work hours. One client reduced her workload to less than 30 hours a week, while continuing to pay herself a full-time salary of $150,000 a year. In the future, she’ll need to hire someone to handle her management workload—but for now, her team continues to be productive.
- Example H: Salary plus commission: A client paid themselves a salary plus a small commission on each dollar of revenue the agency received (regardless of whether they were the “salesperson” on the account). In my experience, “the owner automatically getting sales commissions” is not a common practice—but it made it easier to afford paying commissions when they later hired a salesperson full-time.
- Example I: $115K+ as a single income: A client in a small town outside a moderately-priced city paid himself a total of $115-125K annually, including $75K in salary and $40-50K in draw. His spouse is staying home to raising their kids, and their low cost of living means they can afford to live off a single income. (This wouldn’t work if they lived in a high-cost city, or in the Central Business District of their current metro area.)
- Example J: $300K base plus a portion of $1MM+ in profits: A client in a mid-sized city paid themselves a salary of $300,000 a year plus distributions from a portion of over $1 million in profits. His accountant advises how much to take in distributions, balancing tax bills with what the IRS expects him to take via payroll.
QUESTION: What do you want to change about your compensation as an agency owner?
This article was written for Business 2 Community by Karl Sakas.
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