One of the most common questions Architect directors ask me is the old:
“Am I doing ok? Is this good compared to other Architects?”
And it’s a common issue in most businesses in Australia. We have a habit of not talking about salaries, success, or anything money-related at all. And so when you’ve been running your Architectural firm for a number of years, you really tend to have little idea of what ‘ok’ is, and where you sit in grand scheme of business.
But I think with a field as complex as Architecture, setting your director salary once and forgetting about it doesn’t work. Every 7 to 10 years, the market breathes. At full inhale, the market is booming and the money flows, and at full exhale, directors are starving for air and wondering why they chose to open a business!
Ok! Perhaps that’s a little extreme, and certainly you can thrive even in the lean years. But the reality is that your salary should be breathing up and down alongside business cycles – it’s the best way to guarantee that your business can continuously grow year after year.
Let’s break down some math and work backwards.
Your Director Salary Should leave a Profit Margin in the Business.
While this may seem like obvious advice when said out loud, I’ve yet to meet a director anywhere in Melbourne that sets their annual salary based on the business’ profit margins. They tend to set it based off their personal needs and hope for the best. This slowly builds up unrealistic expectations, as we remember our best years, and quickly forget our worst.
A business must grow – if it stays 100% stable, it will eventually shrink. However that growth doesn’t need to mean staff growth – it just means that the business must continuously evolve and change with the times.
For a business to continuously grow year after year, it must have at least 10% of its revenue available every year as untouched net-profit. For example, if you’re doing 2 million dollars ex GST in revenue each year, your business should be saving $200,000 for growth and change. If you’re only doing $500,000, then that number drops to $50,000.
The difference between that 10% and the actual operating expenditure of the business – that’s the director’s viable salary. And that’s often somewhere between 20% to 30% of the business’ total revenue – divided up between however many directors there are. (This gets a bit less if you intend to pay a fixed shareholder dividend each year – most Architects don’t).
But one of the issues is determining these numbers – when we don’t know them at the time. Let’s discuss some of the models I’ve seen.
Three Common Salary Structures for Architect Directors
In Melbourne, I generally come across 3 different structures when it comes to setting up pay packages as the boss.
- 2. A different salary, set each year, based on the past audited financials.
This method is fairly clean, and probably the least common method I’ve seen. Accountants don’t like it because it’s poorly optimised for tax, but the business itself enjoys it, as the profit and loss statements read objectively true month-to-month. I personally used this method when I was CEO of a health business in Malaysia, as it rewarded constantly driving the business growth forwards.
But this method is also great for any Architectural business that might have silent shareholders, as it doesn’t interfere with true issuing of dividends each year. I’ve never met a business with silent shareholders who weren’t spouses.
- 2. A base salary, plus a variable monthly dividend.
I see this method quite often and I think it’s the cleanest compromise.
You set your base salary based on your analysis of your leanest year. That is, what salary could you take if you wanted a 10% net profit in a really bad year? That becomes your permanent base salary – what you can always count on.
Then if your business is outperforming and making extra net profit, you can draw dividends down to that 10% profit margin.
It’s not tax optimised, but it’s business-ready. It only has one flaw – directors tend to draw too heavily in April, thinking the business is doing well, and then when the business makes a loss during the December moratorium, they don’t pay the business back. But if you’re aware of this pitfall, it’s a great way to set yourself up.
- 3. A base salary, plus a director loan. (The risky way)
Frankly speaking, I don’t like this method, although I’m seeing it all the time amongst Australian Architects. Your accountant may recommend this method as it’s a tax optimised strategy.
The director takes a base salary based off a lean-year scenario, and then in good months, instead of taking a dividend, they take a loan from the company. As this is not income (you owe the company money), accountants can do fancy tax tricks and get your more personal cash.
And I cannot recommend this method to anybody. I’ve been director of a large multi-outlet business, and I can tell you that insolvency is a serious possibility for even the strongest business. One day, even McDonalds will go bankrupt – it’s the natural lifecycle of any business when you zoom out far enough.
When a director takes a loan from the business, they owe that money back. And if the business ever needs to be closed, that director will be forced to pay the balance – possibly destroying their personal wealth.
Wasn’t the whole point of setting up a PTY LTD company to provide protection against liability?
So How Should You Set Your Salary?
Simply put, set your salary based off a lean year. A year where things aren’t going great. Make sure you leave 10% of your ex GST revenue in the business. That money doesn’t just sit there. It’s ready for investment into change:
- Better marketing
- Better sales
- Renewal of equipment
- That long-service-leave liability that you forgot about and now the staff member wants to use.
- Proof of profitability for a potential business sale.
- Or just a good old fashioned slow down so that the director can take a rest.
Set a strategy so that you aren’t flying blind.
