How to determine your salary as an architect

When it comes to an architect’s income, you’ll find the word “underpaid” comes up often.

For many architects, money is not the primary driver. They’ve chosen the profession because they have a genuine passion for design and want to make a lasting impact on the built environment.

So what happens when those architects decide to go off on their own and start their own practice? How does one balance the desire to see that business grow while also keeping food on the table at home? 

Nearly two years ago, while sitting on the panel of an architecture conference, the topic of  income was raised. An architect in the front row explained that the process she and her business partner use is to pay everyone at the end of the month, and split the rest “if there is anything left.”

The audience chuckled, but I bet that, in that group of 200 small architecture practices, there were many people in that room who recognised this scenario as being too close to home for comfort.

Architects who start their own practices often face a classic entrepreneur’s conundrum: pay the business or pay yourself. This situation is born of some mindset problems that can and must be resolved in order to build a sustainable and thriving architectural practice.

In 2018, Smart Company interviewed 30 Australian small business owners to find out how much they were earning. According to the business publication, nearly every founder paid themselves nothing at the start of their business and didn’t start paying themselves a salary until one or two years into the business. 

While it’s understandable that a budding entrepreneur would want to put all of their earnings into the business so it could have a chance to grow, paying yourself nothing is not a viable option. 

You are not your practice 

Firstly, you must understand the distinction that you, as leader or owner of the practice, are not the practice. You are an employee of a separate entity that is the practice. 

Now, you might argue that your practice’s legal structure allows you freedom to choose when you want to pay yourself and how much. That may well be the case but you should still see yourself as distinct from the organisation itself. This allows you to think like a shareholder or business owner when appropriate and as an employee when that is the required mindset. As a shareholder, you should be looking for a share of profits (commonly referred to as dividends) and to see the overall value of your practice growing.

Surviving long term

Secondly, for the practice to be sustainable, it needs to be able to pay each of its employees (including you as the owner) the going ‘rate for the job,’ or market value. 

Think about it. Why would you work for your own practice for less than you could earn working for another practice that would also remove significant hassle and accountability? 

Consider including the salary in your practice’s monthly budget. All businesses should have a budget that include a ‘rate for the job’ salary for the owner. That money can then be taken out in increments each month, or be used to create a debt in the business for a later payment.

While there’s nothing wrong with an owner foregoing payment until a later date, it would be easier to account for the owner’s monthly “cost” each month. That way, at the end of each month, you have a true and whole picture of your business’ performance.

Turning a profit 

In addition to paying its staff appropriate salaries, the practice must make a profit. Ultimately, this allows the shareholders or owners of the practice to be rewarded for their investment and their risk. 

Profit also allows for investment in the practice and for the creation of a ‘rainy day fund’ that may be needed in difficult times.

When it comes to financial reporting, a Profit & Loss Statement is one of the best indicators of your practice’s performance. Yet it is important that you properly account for an owner’s salary in this statement.

Many times, we’ll see architecture firms quote a small owner’s salary in their statements. While that owner may technically earn that amount in annual salary, the truth is that their total remuneration package is much greater because of other factors, such as dividends paid out to the owner. Business owners might implement this system to help them lower their taxes, since dividends are taxed less heavily than salary would be.

No matter the reason, it’s crucial that you report a true and all-inclusive P&L Statement each month, accounting for the full “cost” of the owner. Additionally, we suggest you create another, separate P&L Statement that clearly reflects how the owner’s cost is paid out in cash and dividends. This will allow you to stay organized and make informed business decisions in the future.

So how do you know how much to pay yourself?

There are many factors that should go into the decision making process. 

In the book, Start Your Own Business, the staff at Entrepreneur Media argue you should consider your living expenses, financial situation and comfort level with using your own personal savings to fund your business.

Once you’ve come up with the minimum amount needed to cover your monthly expenses, consider your market worth. If you were to start working for another firm, how much would you demand from your employer? What’s the going rate for your skill set in your city?

Then, compare the two against your practice’s finances. Come up with a plan that allows you to be paid without exhausting your cash reserves. Once your business starts making a profit, re-evaluate your salary and adjust as needed.

What has happened in many architectural practices is that struggle, shortage of cash and stress have become the norm. There’s an overwhelming notion of: “That’s just the way architecture is.”

Truth is, it doesn’t have to be that way.

Our clients make profit. They pay appropriate salaries to all staff, including themselves and they have adequate financial reserves to provide for unforeseen eventualities.

At Archibiz, we offer business coaching and mentoring to architecture practice leaders who are looking to build profitable and impactful practices. To inquire about coaching, contact us directly by filling out this form, and we’ll find a time to chat about your needs and how Archibiz can help. Alternatively, you can sign up to receive our bi-weekly Mentor Memos below and receive tips like this straight to your inbox.