Feeling a Pinch on Payday; Putting the Business First August 19, 2004 By SHIRA BOSS-BICAK The New York Times Most employees would light up like a firefly at the thought of filling out their own paychecks. Yet entrepreneurs have that opportunity, and many of them are not having much fun with it. At the other end of the spectrum from greedy corporate officers are business owners who balk at paying themselves a decent salary, even while running profitable operations. But letting a business gorge on cash that could have ended up in the owner's paycheck has its own problems, experts say. ''We have a hard time getting owners to pay themselves what they should,'' said Howard Smith, a counselor with the New Port Richey, Fla., chapter of the Service Corps of Retired Executives, a government-sponsored volunteer program that gives advice to entrepreneurs. ''You'd think it'd be the other way around, but it isn't.'' One of Mr. Smith's clients is a fertilizer manufacturer, United Agricultural Services of America, in Hudson, Fla., run by Mark Pecsenka and his brother Lajos. As with most start-ups, the first few years were lean, and the Pecsenkas lived on savings while paying employees. A decade later, the company has posted healthy profits for several years, but both men are still living on a self-imposed shoestring, even though their parents, the owners, are urging them to increase their salaries. They refuse to do so, partly because they recently took a long-term mortgage on land for a second factory and they want to pay it off within five years. ''We're very tight,'' Mark Pecsenka said. ''We pretty much take every penny in profits and put it into the land and the machinery.'' He says he does not eat at a restaurant unless he is entertaining a client and has no plans to give himself a bonus. Some business owners who scrimp on their compensation say they do not care that much about money. Others are hoping for a bigger payoff down the road, whether from increased profits, a sale of the company or a public offering. Either way, the underpayment tactic can be risky. ''It's a problem in that they're shouldering all of the risk,'' Mr. Smith said, ''they're the ones paying the bills and guaranteeing the loans, and they have the right to be compensated well.'' If a business does fail, the owner has lost twice: first on compensation and then on capital investment. So, even in the years when businesses cannot afford to pay their principals their salaries, Mr. Smith urges them to determine what a fair pay package would be and to book the amount as an account payable. The disadvantage to that strategy is that the company will be building its liabilities when it can least afford to. But not doing so can land owners in a bigger trap: fooling themselves -- but ultimately not potential lenders -- into thinking the company has balanced its books when in fact it is not making enough to cover its actual expenses, which include the cost of the owners' time and effort. ''By forgiving that payment, the company is further misrepresenting its performance,'' said Ferit Ferhangil, co-owner of BF Capital Partners, a boutique investment firm in New York. One problem in determining how much compensation to take and when is determining when the start-up phase ends and the profitable-business stage begins. ''It's your attitude,'' says Edward Rogoff, author of the book ''Bankable Business Plans'' (Thomson Texere, 2003). ''What to one person looks like a mature business looks to another like something you're getting ready to roll onto the launch pad and make 10 times bigger.'' Cem Sertoglu and three partners have been bootstrapping their four-year-old technology company, SelectMinds, in New York, hoping to grow value by further increasing their $3.5 million in revenue. ''Our decision has been driven by a sustenance conversation: what is the minimum it takes to pay the bills and not need to get another job?'' Mr. Sertoglu said. ''It's not even close to what would be defensible to the outside investors.'' Though the partners do divide up profits and award themselves bonuses at the end of each year, the company makes out better than they do. ''When I think about everything I can invest in the company versus what I can take home, with half of that going to the government, it makes it difficult to take home more than the minimum it takes to live on,'' Mr. Sertoglu said. Banking on a company's future value is the most common reason to decline pay -- entrepreneurs almost universally think the business will give the best return for their investment -- but their decisions are usually not based on actual calculations of how much they are putting in and how much they expect to get back. ''It's done with the hope that they're building something bigger for the future, not because they're stupid,'' said BF Capital's Mr. Ferhangil. ''But in terms of foregoing X amount of compensation and figuring out what return it should be worth? I've never seen a single soul who does that calculation.'' One reason is that the psychic payoff of running their own show is more important to entrepreneurs than getting rich. ''Keeping the company going has been my goal,'' says Judi Firestone, who founded CRSN, a computer consulting company in Cleveland, 18 years ago. ''I didn't leave the corporate world happy, and it's been the fun of being able to make my own plans.'' There is something else, however, that stops some entrepreneurs from taking fair market value for their services: the fear factor. They see themselves as responsible first for the livelihood of the business, then for that of their employees, and lastly for themselves. Jennifer Gilbert, for example, takes her pay from her $25 million events-planning business in New York, Save the Date, only at the end of the year when everything else, including next year's expenses, has been accounted for. Then she lives on it for 12 months. Her cut is not small. She describes it as ''on par with what most men in investment banking are making.'' But nervousness over what the business, and its eight employees, might need keeps her living beneath her means. She and her husband recently signed a contract on a larger apartment, then backed out of it. ''Part of the reason I didn't buy it is because I thought I'd be stretched on what I could leave in the company,'' Ms. Gilbert said. Even as they skimp on their pay, many business owners show generosity toward their workers. Shortly after Lisa Kaiser Hickey bought her father's screen-printing company, Douglass Screen Printers, in Lakeland, Fla., eight years ago, she says, she created a formula to give all employees reviews and performance-based raises every six months. Yet even after increasing revenues from $1 million to $3.5 million, she habitually shortchanges herself. Last year, which was highly profitable, she says, she took only half the bonus she was due. ''My husband was irritated with me,'' she said. ''He said, 'Take the full amount.''' Ms. Gilbert, the New York events planner, said she remembers her accountant suggesting that she get rid of her staff, work from home and make four times as much money. ''But to me that's not a business,'' she said. Business counselors and even spouses can try to get business owners to follow their advice about compensation, but often have little success. ''Most entrepreneurs are irrational; that's why they're successful,'' said Charles Epstein, a financial planner and family-business specialist in Springfield, Mass. ''They're willing to take risks that wouldn't be taken if it were left to the accountant and the lawyers. The entrepreneurs who don't do it for the money are probably some of the wealthiest people on the planet.'' © copyright 2004 The New York Times Company