Employee vs Business Owner (Money)
Employee/employer relationship is a very big topic, so for the first part of this series, I’m going to focus primarily on the money side, which is, let’s be honest, an important part of the equation.
My goal is not to bash or promote any side, but to give you a fair and honest assessment based on my personal experience so you can decide for yourself which side makes more sense.
I worked 16 years as an employee for 11 different companies and 6 years as a business owner, so I think I got some things to say on the subject.
Okay, so let me ask you a question.
What would say is the main difference between an employee and a business owner?
If you are like most people, you’ll probably answer something around money, power, or freedom.
But the first thing to know is that both are not mutually exclusive. For example, I’m currently an employee of my own company.
It’s an important concept as many first-time solo founders don’t always understand the difference as they usually wear both hats.
The result is often one side being neglected, either by working for free or by getting a bad return on investment.
In a healthy company, both the employees and business owners should be happy even if it’s the same person.
It’s not a very complicated idea, once you get your head around it, but it definitely took me a year before discovering, understanding, and internalizing the idea.
Okay, so let’s talk about money.
Although it’s fairly easy to get some information about salary for employees, there is a total lack of transparency when it comes to business ower compensation and it’s not hard to understand why.
An employee is paid for the work done, through a salary and sometimes bonuses. So this is quite predictable.
In fact, this is even agreed upon before entering an employment contract.
You’ll know exactly how much you’ll earn before starting your first day at work.
A business owner, on the other hand, is compensated for how well the business is doing, primarily via dividends.
When we look at a financial statement, the salaries are part of the expense line.
A business owner takes what is left from profits. And Profits, simply put, are revenues minus expenses + tax.
So if the business makes no money that fiscal year, the business owner doesn’t receive any compensation, while the employee will have received a salary for the work done that year.
If the business loses money because of a failed initiative, it’s usually at the expense of the owner’s compensation.
Broadly speaking, a salary is a guarantee, whereas profits are not.
On top of this, the owner could decide to re-invest the profits into the business to help the business grow faster.
Of course, if the business is doing very well, the business owner can decide to receive many years of an employee’s salary in one go. And this is the vision that most people have of a business owner. (They focus on the event, not the process.)
3 years after starting my own business, I remember how surreal it felt to pay myself 6 months of my past employment salary just as a bonus and I verified many times that all transfer details I entered were correct before I pressed the confirmation button.
To increase salaries, future employees primarily rely on education.
Spend 3 years at university to get a degree and your salary will be higher to compensate for those extra years of education with the promise that, in the long run, more education leads to higher salaries.
This is causing problems with educational inflation as everyone is pursuing the same strategy. You now need to spend more years to get a higher degree to differentiate yourself from all the other applicants.
If that wasn’t enough, there are 5 more challenges that employees have to deal with in recent years:
First: Education cost is increasing, making it harder for low-income families to get a good education (at least in the US)
Second: The spread of remote work means that employees are now competing worldwide for the same positions.
Third: The advantage of high education is diminishing to the benefit of experience, which is also reinforced as you progress in your career.
Fourth: Your current job may become obsolete with new technologies.
Finally, employees are limited to 40 years of productive labor and need to accomplish their financial goals during that time.
So the future is not very rosy for new people entering the workforce as employees.
A business owner on the other hand will take a bet that the company will grow and may have to go into debt or sell part of the company to investors like venture capitalists to get enough money to reach profitability.
The promise is that in the long run creating a company will command more wealth than having a high salary as an employee. Otherwise, who would take those risks?
And that is true. Where a salary follows a linear growth, a business owner’s compensation can be exponential if the business manages to grow, which is not given and definitely not as easy as it sounds.
On top of growing a company, business owners have a few more challenges of their own:
First — Anyone can compete, straight out of college, as business opportunities are not bound to capital anymore. A student in a dorm room can create a company that will make your business obsolete in just a few years.
Second — Some countries have no safety net for business owners who fail. For example, you can’t pretend to have unemployment benefits as a business owner where I live. So, failing can have serious consequences. And of course, you only hear about the ones who succeed.
Third — The increasing effect of the winner takes all in our globalized society makes it harder for average companies to generate a lot of wealth.
Fourth — Remote work also means that your employees are not limited to local job market salaries and your management practices will need to align with the rest of the world.
Finally, there is no predetermined path to success, no book or course will get you there. You’ll need to find your own formula.
At the time I switched from employee to business owner, I was making about 11k/month as an employee.
My business on the other hand was making only $2k/month in revenues when I decided to work full time on it. So I was missing on 10k/month compared to if I carried on working as an employee (business had expenses).
And this lasted for months. So the cost opportunity was significant.
Fortunately, this is a happy ending here as my business did take off. If it didn’t this would have been a pretty sad story to tell.
As an employee, your biggest lever when it comes to increasing your salary is probably to changing jobs. In fact, this is what I did. Sure you can always ask for a pay raise and negotiate but it’s not always easy for businesses to adapt to big changes in costs.
To increase a business owner’s compensation, you either need to lower the expenses, or increase revenues.
Now here is one thing employees rarely understand. Saving $1 in costs is much easier than making $1 in profit. To make $1 in profit, assuming you have 20% margin, you will need to sell an extra $5 and that is without even taking taxes into account.
This means that the faster way to increase business owner compensation in the short term is to reduce expenses. And since salaries are often the biggest expense in a business, it’s easy to understand why you often hear about massive layoffs to put a company back in shape.
As an employee, I experienced this firsthand with the fall of Argonaut Games. One morning, we were all summoned to the 3rd floor of the building to be informed that the company was filing for bankruptcy and so we all lost our job.
It’s no fun, but I guess it wasn’t for the owners as well. In one month, I had another good job at Electronic Arts, a better job even. it will take them years to recreate a company this size.
As an employee of my own company, I have both: a monthly salary to compensate me for the work I do every day and dividends at the end of the year should the company be profitable and should I decide to exercise that right to reward the risks to create the company and lack of proper income for months.
This is capitalism 101.
To conclude this part, my take is that if you want to build true wealth, it’s incredibly difficult as an employee, but it doesn’t mean it’s easy as a business owner either because very often, what you hear is successes, not the vast majority that fails to build a business.
Alright, so how much was I making in my career?
- I started working full time in France, but unfortunately, I didn’t keep my payslip.
I worked for UbiSoft Paris, for a bit more than 1k euro per month I think I recall. It lasted about 3 months before I got fired. I said in an email that I was working on a rubbish game (in less polite terms). Ooops. This was true though, the game had one of the worse ratings ever.
I then worked for an insurance company, I got paid about 1,800 Euro per month for a year, then worked for another video game company.
I remember I made about 14k old Francs in France per month without taxes. That must be about 2k euro per month. I was so happy to earn such a good wage in games.
Then I moved to the UK, where I started at £18 a year at Lionhead, went to many companies, earning about £30k at Argonaut Games, made £60k at BNP Paribas (just 3 months, could bear the thought of staying there even with good money), and reached £80k at peak of my career in Finance in the UK.