Providing an incentive program (a.k.a. bonuses) for the leadership team of any size business is crucial because it shapes the actions and behaviors of the most visible people in the company. So there’s a tremendous trickle down effect. Additionally, it clearly ties the leadership team to the critical goals of the company and quite frankly, if the goals are not met, there should be no bonuses. Lastly, if properly structured, they help foster a sense of team for the CEO and VPs of a company and team effort will always outperformed individual, “silo-ed” efforts.
The following is a suggested framework for goals and bonuses that should be very applicable for most small or medium size businesses.
- All leaders in a business should be goaled on the following four areas:
- Each goal should not be less than 15% weighting. In my view, it’s the minimum proportion to denote the goal as important. Anything less can be dismissed.
- Each goal has a floor and a (flexible) ceiling. Example, nothing is paid out unless at least 90% of a goal is achieved. On the upside, bonuses can double for 120% achievement but are capped there with some flexibility to pay more for super over achievement.
- Overall bonus is expressed as a % of salary at plan. Example, for 100% goal achievement, CEO’s are rewarded with a bonus equivalent to 50% of their salary and for VPs, its 30% of salary.
- Lastly, I believe that the VP of sales should also have a incremental quarterly bonus or commission structure.
a. Revenue. What is the revenue goal for the year?
b. Profitability. What is the profit goal for the year?
c. Customer Satisfaction. This should be measured as a regular basis, at least twice a year is preferable.
d. Employee Satisfaction. All companies should measure (and care about) employee engagement.
There may be circumstances where a special 5th goal is appropriate, based on company circumstances, but never more than 5 goals in total should be assigned.
The last element is the varying goal weighting by function within the leadership team, which I propose to be as follows:
|Revenue||Profits||Customer Satisfaction||Employee Satisfaction|
|VP, Technology or Operations||20%||35%||20%||2|
The general theory here is that certain people will have more influence on certain elements and weighted accordingly (e.g. Sales: revenue, HR: employee-sat, Finance: profit). But equally important is that all leaders are tied to all 4 goals so that, as a team, they largely succeed or fail together.
Please let me know how you feel about this. Do you agree? Disagree? Comments welcome.