Call it sweat equity. Amid the financial crisis, more business owners facing a cash crunch are opting to forego their salaries when trying to ensure their companies maintain sufficient cash flow. It’s a route many people are taking to make payroll, pay suppliers and just keep the lights on.
When things get really tight, you might even need to take similar steps with some of your employees.
“When people give up their salaries, that’s a way of financing your company,” says Lawrence Gelburd, a lecturer in entrepreneurship at Wharton.
Here are some things to keep in mind if you decide to go this route:
1. Don’t say you’re eliminating your pay. Instead, defer your pay, and track it. “Investors don’t want to pay your old salary,” says Gelburd, a former entrepreneur who advises small companies. “If it’s being tracked, you might be able to be paid later.” In other words, make it clear that the money due to you has been transformed into something akin to an accounts receivable item.
Depending on your situation, you could take it a step further and ask your salaried employees to take unpaid leave or vacation, and defer some portion of salaries for a period of time.
“You could say, look, everybody’s going to take a deferred salary for a week or a month until this blows down. Sometimes people are willing to do that,” says Gelburd. It doesn’t have to be the whole company. You could include only the owners and executives. “If the management does it, it’s a less bitter pill to swallow than if you ask just the employees to do it,” he says.
There are additional possibilities, such as unpaid furloughs or asking some employees to take off, say, one day a month, or one day a week without pay.
2. Consult with your lawyer. Before asking management or employees to take a salary deferral, make sure your plan won’t land your business in legal trouble that could wind up costing it more money than it saves.
3. Talk to your accountant or tax consultant. There can be important tax implications regarding deferred salaries. “You have to look at your specific situation, but I would be on the conservative side and just set aside the full amount for federal state and local taxes as if the full salary was there,” says Gelburd.