I have been asked this question frequently this past week so I shall provide some insight.
It is a huge balancing act that requires a clear understanding of your numbers, gross revenue, profitability, overhead, cost of goods, and yes your currrent payroll.
Your numbers provide the answer and it cannot be determined without information.
I say this for two reasons. Most businesses tend to add payroll over time either from raises , overtime, or simply having too many employees and too low productivity from them it break the bank casing loss of profitability and possible downturn.
In fact I would love to answer the question by saying all payroll, employees and executives, should be determined as a direct function of productivity and profitability. This is the only real way to keep the equation in balance all the time automatically, it keeps everyone at the highest possible productivity level and always provides a profitable bottom line for the company and thus assures continuity and long term employment, as well as an owners draw.
Pay the employees too much and take too much and the business crashes. What typically happens is, as the payroll goes out of balance in relationship to revenue and profitability, the owners take no pay check to balance the equation while the employees absorb their normal pay. If productivity is low and profit non existent, the owners make it up by not taking a paycheck, pretending this is an acceptable adjustment…Not so.
However leaving incentive based reward systems to another post, the classic equation for a business owner to start with is: one third of the revenue allocated to cost of goods, one third allocated to fixed overhead, one third to gross profitability. In the end if there remains a 10% net profit, the business is healthy.
I find that the payroll should exist somewhere between 25-33% of revenue, a wide swing depending upon the type of business you have. However this still requires the gross revenue and inherent profitability to be in line or nothing works out well at all.
As for compensating the owners or executives, the benchmark is industry standards for a business of similar size in the same industry. However this too must be controlled by the profitability and gross revenue of the business.
In short if the owner takes a reasonable check based on comparatives, and has a remaining profit for the business of 10%, then all is IN BALANCE. The real quetion is and always will be the productivity of the employee base and therefor the profitability of the company, the funds from where payroll is drawn.
Figure these numbers out first, and then determine the number of employees you carry so the payroll fits int a profitable equation with a ten percent net profit at the end and with the owner taking a reasonable pay check and you have the deal. To accomplish this you may have to add incentives to increase productivity, remove overtime completely and train effectively, making certain the employees have a clear understanding as to what is expected and how they are doing.
In the end if gross revenue is down, and the employee cost is not adjusted, nothing will work and downsizing is in order. Alternatively increase revenue by more effective marketing and sales development. This is what I mean by balancing the equation.
All the guidelines in the world are meaningless unless you take the entire equation into consideration. Payroll must be a direct function of gross revenue, profitability and productivity. The task is to force your payroll figures into this equation not the other way around which is a typical mistake. Its not how much payroll you should have, its how much payroll the business equation can afford, this number is a direct function of your overall productivity, profitability and gross revenue and this must be computed first before you can determine how much you have available for payroll and then make it happen. If the numbers do not work, you must increase productivity with incentives and training, decrease payroll or make other basic changes to balance the numbers.
