Your Business: Paying yourself - James McCarthy, Spidertracks

Spidertracks CEO James McCarthy (right), pictured with Luke Aspinall, manager of special operations at Heliwest Group - Spidertracks' largest Australian customer.

James McCarthy is CEO of Spidertracks, an aviation safety company, which was incorporated in 2007.

When did you get to the stage in your business when you could start paying yourself?

We had a policy of accruing remuneration to ourselves as soon as we started, even if it remained unpaid because of cash shortages. This dealt with any inequity between the shareholders, who were putting different amounts of time into the company.

It obviously has a negative cashflow effect if you're paying tax on income that you haven't received, but I think doing things that way was worth it to maintain a perception of fairness between our shareholders. Initially we weren't paying ourselves market rates, though; it was probably more like 50 per cent of a market rate.

How did you figure out how much to pay yourself?

Working out what to pay ourselves was a difficult, and in hindsight interesting, exercise. Provided we had the income, and we were capable of earning more elsewhere, we tended to increase our salaries each year. We did this as long as we weren't materially affecting the growth of the company.

The salaries weren't necessarily benchmarked, and were governed more by the state of the company than any market comparison. Maintaining fairness amongst shareholders - while we were all equal shareholders - was more important to us than absolute salary.

Setting salaries that were below market rates allowed us to grow our business without needing to dilute our shareholdings, or have to find other sources of external cash, while still generating equal long term value for each of the shareholders.

We've always paid, or accrued payments, on a regular schedule, and the time we've put into the business has been remunerated irrespective of the financial performance of the company. Anything additional is a shareholder benefit, which has been paid as either loan repayments or dividends.

Has the way you pay yourself in the business changed over time? And, if so, when and how do your review this?

Yes. Now that the business is mature and has a more diversified shareholding, all salaries are paid at market rates, set by our board's remuneration subcommittee. We've been doing this for the last three years now, since we brought in an independent board, and the subcommittee reviews this annually.

What have been some key learnings for you in this area, and what advice would you give other business owners about how to handle paying yourself?

Make sure you're aiming to pay yourself a market salary once you're up and running. If your business isn't a worthwhile investment once you're paying yourself a market salary, you're possibly not in the right business, or you're not the right person for the job.

Ultimately a necessary endpoint may - and I think it really should - be to move out of your executive role. And when you do this you want your salary to fund a suitable replacement, while your business still provides returns, such as dividends, to you. But if you're in business purely for lifestyle reasons, you may well choose to ignore this advice!