Setting Store-Owner Salaries: Too Much ‘Gimme’ Can ‘Getcha’

If you own a jewelry store, setting your salary and bonus can be a tricky matter. Pay yourself too much and the store suffers. Pay yourself too little and you’ll wind up feeling burnt-out and demoralized. To strike the right balance, consider the strategy recommended by John Michaels, who leads a management group for the American Gem Society when he’s not running the Waterbury, Conn., chain Michaels Jewelers.

As a starting point, Michaels suggests using data from the Robert Morris Association (RMA) of Philadelphia, which provides bankers with lending and credit-risk information on various business sectors, including jewelry. Use the median owners’ compensation as a base for your calculations.

In 1998 this was 5.2% of net sales for jewelers with annual revenues from $1 million to $3 million. The range of owners’ compensation at these stores – including salaries, bonuses, and commissions – was 3.8% to 9.1% of store revenues. At stores with revenues between $3 million and $5 million, median compensation was 4.0% of net sales (range: 2.3% to 7.6%); and at stores with revenues from $5 million to $10 million, the median was 1.8% (range: 1.2% to 3.0%). (RMA doesn’t collect data for stores with revenues below $1 million.)

Once you’ve established the base salary level, add to that the market value of what an employee would be paid to perform the additional services you provide. For instance, if you also serve as store manager, that salary is approximately 3% to 3.5% of revenues in a $1 million store. If in a typical week you also spend 10 hours on repairs, 10 hours selling, and 10 hours on appraisals, your salary should reflect the market value of those services as well.

The most important step, though, is to total the numbers and evaluate whether you can afford to take that sum out of the business. The upper limit depends on such factors as how efficiently the owner runs the business, how family members working in the store are compensated, and whether the owner needs to report profits to a third party to pay off or take on new debt. The whole store payroll, including the owner’s salary, should be capped at 25% of net sales, Michaels says.

You need to balance immediate personal gratification with your long-range business goals. Says Michaels, “I can’t tell you the number of businesses I’ve seen where typically young people say, ‘Oh, this business is here to generate income for me.’ Their attitude needs to be, ‘I need to make sure the business flourishes, and a flourishing business will take care of me.’ That’s a subtle distinction, but an important one for someone who’s debating whether to buy a new $4,000 gem scope or take their spouse on a ski trip instead.”

According to JCK’s most recent salary survey (JCK, November 1998, p. 70), the median store owner salary was $60,000 for the 1997 calendar year, up 20% from ’96. The range of salaries was wide, $18,000 to $225,000.

Salary Strategies

1. Take care of your people first. Know what the competition is paying and pay your employees as much as you can.

2. Implement a pay-for-performance system. The system should link store profitability to compensation. If employees help the company make more money, they in turn should make more. Set it up so all of your employees – in selling and support functions alike – are motivated to excel.

3. Link your own bonus to store performance. Challenge yourself by establishing a formula that ties your contribution to profitability to the amount of your bonus. This forces you to keep your eye on the ball. You’re rewarded only when you do the job right. Bankers and equity investors in your business appreciate this form of self-imposed discipline.

4. Invest long-term in your store. If you have an especially profitable year, don’t automatically give yourself a bonus. While you have extra funds, consider new display cases, new carpet, fresh paint, a new roof, and other investments in your store’s future viability.

5. Watch out for taxes. If a store owner takes too large a bonus in years when the store has especially big profits, the Internal Revenue Service might treat that bonus as a dividend. The consequences: You’ll pay income tax on that income, but the business won’t get to take that amount as a deduction. Consult your tax adviser about these limits.

Source: John Michaels of Michaels Jewelry in Waterbury, Conn.

Jeweler Becomes Real Estate Developer

When Suzanne Cannon, the third-generation owner of Steffan’s Jewelers in McHenry, Ill., expanded her store last year, she did so in a big way. She not only decided to stop renting and move into her own vastly expanded space (3,000 sq. ft.) but also made her store one part of a $2 million, 10-store, 17,000-sq.-ft. shopping center, in effect becoming a real estate developer.

Several banks advised Cannon and her partner not to proceed with the Fountain Shoppes of McHenry. The bankers warned they were putting their financial health at risk by financing and building the strip center before it was fully leased. But, she says, “I went by my gut instinct. I’m going to be in this business another 20 years, so the question became, ‘Do I want to pay rent for 20 years or own a building for 20 years?’ ”

A stand-alone location was out of the question for security reasons. Another reason for building the strip center was the potential for increased walk-in traffic. Cannon didn’t consider moving to a larger leased location. “A jewelry store is the most expensive kind of showroom to create,” she says. “To do that in a building you rent just doesn’t make sense.”

Financial hurdles. Cannon’s project proceeded on track until she had to come up with $300,000 for the new store’s interior. Her banker would lend her only a third of that amount. Instead, she borrowed $100,000 from a state development fund. She started paying off the remaining $200,000 owed to contractors with preliminary installments last fall. Meantime, Cannon entered the holiday season with $350,000 in new inventory that longtime vendors offered with extended credit terms.

Fortunately, holiday revenues soared 42% higher than in the previous year. Cannon paid off her contractors in December and her vendors by mid-January. “I had to do it because no one would lend more money,” she says with a laugh.

Building the strip center turned out to be a savvy way to fund Steffan’s ongoing costs for space. With nine out of 10 stores leased by January, the tenants’ rent payments were already paying off the mortgage – and then some. “It will take two years of rent payments to recover the original 20% down payment on the property, but that’s toward a building we will own,” she says.

Though most jewelers wouldn’t dare venture into real estate development, Cannon recommends the move. “When you start developing a really nice building, you might as well go all the way and have extra rental units.” In her case the situation was unusually favorable. She’s in a prosperous, fast-growing area (45 miles northwest of Chicago) with practically no competition. The scenario isn’t always so rosy, of course. What you need to succeed in real estate are the right location, appropriate costs and rent rates, the right mix and number of tenants (none of whom face too much local competition), and a strong local economy.

Given this rather daunting list, Jon Bridge, who handles lease negotiations for Seattle-based Ben Bridge Jewelers, recommends that jewelers avoid getting into real estate development: “Jewelers know jewelry. Real estate is a whole different investment game. In most instances, you probably will not end up making ends meet. It seems to me that jewelers are better off concentrating on what they know best.”

That’s the traditional view. Cannon’s experience, at least so far, indicates that real estate development may be a viable option for jewelers in the right situation.

For additional insights into what it takes to develop real estate successfully, Shopping Centers and Other Retail Properties; Investment, Development, Financing, and Management is a practical resource. The book is edited by John R. White and Kevin Gray in association with the Urban Land Institute, a nonprofit group specializing in land use and development issues. John Wiley & Sons, (800) 321-5011.

Giving Away Problem Inventory

If you’re sitting on costume jewelry, gift items, or inexpensive watches that just won’t sell, at a certain point you’ll want to eliminate them all from inventory. Though you could get a deduction for donating these items to a nonprofit organization, you can deduct only the actual cost of the merchandise. Above-cost deductions are available if the items are used for the care of the ill, the needy, or minors, but don’t try using this section of the tax code – 170 (e)(3) – without guidance from a tax adviser.

Another option is to channel items through the National Association for the Exchange of Industrial Resources (NAEIR) in Galesburg, Ill., which distributes donations to nonprofit organizations nationwide. In 1998, NAEIR took in $126 million worth of goods, of which roughly 1% was costume jewelry, watches, and gift items. “The donations help jewelry firms solve inventory problems,” says Jack Zavada, NAEIR’s director of communications. In fact, he says, one nationally known company accounted for nearly $700,000 worth of jewelry and executive gifts donated to NAEIR last year.

Jewelry store donations are popular with NAEIR’s more than 6,000 nonprofit clients. Such merchandise is especially welcome in schools, camps, nursing homes, and other social-service agencies, which use these items as birthday and Christmas presents and as behavioral incentives.

For a copy of NAEIR’s guide to the donation process, which includes step-by-step instructions and a formula for calculating the potential tax savings, call the organization at (800) 289-4551.

Mileage Deduction Dips

Anyone who uses a car for business travel should keep in mind that beginning this month the Internal Revenue Service deduction for business miles drops.

The rate is being reduced from 32.5 to 31 cents per mile because of lower gasoline prices and stable 1999 model vehicle prices, according to Runzheimer International, a Rochester, Wis., firm that specializes in business-travel trends. The new 31-cents-per-mile standard is the amount that can be deducted for automobile expenses on 1999 U.S. tax returns for business miles driven.

Key Stats

220,000: Ounces of platinum coins sold worldwide in ’98.

200,000 – U.S. demand (in ounces) for platinum in ’98, up 25% from ’97.

$400 – Projected average price per ounce for platinum in ’99.

$350 – Platinum’s per-ounce price in December ’98.

90,000 – Ounce deficit between platinum supplies and demand in ’98.

467.5 million – Ounces of silver produced in ’98.

64.5 million – Ounces of gold produced in ’98.

4 million – Ounces of platinum produced in ’98.

$2.4 billion – Of sterling silver jewelry was sold in 1997, up from $1.4 billion in ’93.

60 million – Units of silver jewelry were sold in ’97, up from 38 million in ’93.

80% – Of all silver jewelry sold in the United States is imported from other countries, mostly from Thailand, Italy, and Mexico.

Sources:

(Numbers represent order of data presented)

1 Platinum Guild International (USA);

2, Johnson Matthey;

3-8 Platinum Guild International (USA);

9-11 High-Volume Jeweler.