The Hidden Pay Gap: Why Business Owners Should Separate Salary from ROI
As a business owner, you likely watch your profit figures carefully. When those numbers are in the black, it feels like a win. But there's a distinction many entrepreneurs miss: the difference between compensation for your time and return on your investment.
This oversight can lead to years of effectively misjudging the value of your business, yourself, and the competing options for both your time and money.
The Two Hats You're Wearing
As a business owner who also works in the business, you're simultaneously:
- An investor who deserves returns on capital invested
- An executive who deserves compensation for time and expertise
The problem? Most owners blend these roles together, viewing all profit as a single bucket of success rather than recognizing the distinct value of each contribution.
Why This Distinction Matters
Consider this scenario:
- Your business generates $5m in annual revenue.
- Your gross profit margin is 30%: $1.5m
- Your net profit margin, after all expenses, is 10%: $500k
- You're the sole owner who also serves as CEO.
How well are things going? As the only owner, that $500k is yours to keep. That 10% Net Return is healthy. So, you're doing well, right?
Well, let's break it down properly:
- If a qualified CEO would cost $200,000 to hire
- And your business has a $5 million valuation (1x revenue or 10x earnings, in this made-up example)
- With investors in businesses like yours expecting 10-15% annual returns to compensate for their risk and illiquidity
Suddenly that $500,000 looks different. It needs to cover:
- $200,000 for your executive compensation (your job)
- $500k - $750k for investment returns (your capital)
Viewed this way, there may be more room for improvement, and you may not be getting the most out of your current situation.
All industries are different when it comes to margins, multiples, and executive pay, and the above example may look nothing like your business. But focus on understanding the reality for you. As a business owner, you should require a return based on the value of your business, and as a hard-working executive, you should require pay commensurate with your time, energy, experience, and value added.
The "Working for Free" Trap
Many business owners (inadvertently) effectively work for reduced rates or even free by failing to separate these components. They might celebrate a $300,000 profit while working 60-hour weeks, not realizing a proper accounting would show they're effectively earning below market rate for their time when investment returns are factored out.
Exit Strategy Implications
This distinction becomes especially important when considering an exit strategy. If you think about selling your business without having distinguished between these forms of compensation, you might:
- Overstate the business's current value to you, because you are undervaluing how much work you do to earn that pay.
- Undervalue competing uses of your time that could pay you directly for your value-add capabilities.
- Misjudge the expected value of the company to a third-party buyer, who will have to explicitly pay an executive and keep only what's left after the added expense.
A buyer needs to understand that they're purchasing an asset that generates returns separate from the owner's labor; otherwise, they're just buying themselves a job.
Related, a potential seller (current business owner) needs to realize that their capital in the business (the business's value, if you're a 100% owner) is capable of earning them a return regardless of whether they remain in this single business and job role.
To demonstrate, pulling from the example above:
- If you can sell your business for $5m and reinvest the proceeds at an 8% return, then you can still earn $400k per year without doing any more work.
- Separately, you can take on another paying role with your now completely available time (thus earning even more) or choose not to (perhaps improving your quality of life).
- You may struggle to sell your business at a value deemed fair to both you and a new buyer, if you didn't account for executive pay. If the buyer pays $200k of that $500k "profit" to someone else to run the business, then they may only be netting an ROI of 6% ($300k on $5m). They may not value the business at $5m at all. You need to get ahead of this by understanding your value and role in the business, before you reach the end of the journey and have to be told by a series of dispassionate buyers.
How to Start Thinking Clearly
Begin by paying yourself a market-rate salary for your executive role. This should be what you'd pay someone else to do your job—not what you're willing to accept.
Then, view any remaining profit as your investment return. Is this percentage reasonable compared to other investment options? Is it commensurate with the risk you've taken?
If your business can't afford both proper executive compensation and reasonable investment returns, you may need to reconsider your business model, growth strategy, or operational efficiency. "Now" is a much better time to do so than later in your life when the decision to sell or stay may not feel optional.
The Bottom Line
True business success means your company generates enough profit to:
- Pay you fairly for your time and expertise
- Provide a competitive return on your invested capital (even if that "investment" didn't take place upfront and is now a result of "sweat equity" and accrued business value)
- Create transferable value that exists independently of your involvement
By separating these elements in your thinking and accounting, you'll gain clarity about your business's actual performance and make better decisions about its future—including when and how to exit.
After all, you likely didn't become an entrepreneur just to create yourself an underpaid job. You deserve both fair compensation and investment returns. Start recognizing the difference, and you'll build a more valuable business and a more sustainable career and lifestyle.
2025-7893370.1 Exp 04/2026