Recently I was asked to review an offer letter for a senior director of business development. The CEO was concerned that he was offering far too much in the form of incentive compensation, with bonuses that could greatly exceed the base salary if all the bonus items were achieved. I asked the CEO to imagine what the company would look like if all those bonus-expensive items were completely achieved in one year.

Upon reflection, he stated that revenues could double the following year, and that the company’s reputation among larger customers would be so greatly enhanced that the company could become the leader in its niche. My obvious retort: “Then why not offer this candidate the moon if he can achieve this?” The offer was sent and the CEO was much happier, dreaming of the possibilities, not the incremental cost.

I love to point out that my top several sales people were making more than anyone else in the company, including their boss. These outstanding achievers worked for salaries below those of their engineering peers, and had to put it all on the line every day to earn their keep, let alone excel.

The best way to encourage alignment between your managers and the company’s goals is to create a bonus plan for each, with its payments made based upon the key performance indicators established for them and for their areas of responsibility, all in turn based upon the tactics and strategies contained in the company’s strategic plan.

It is amazing how few company CEOs grasp the concept that executives and managers should be compensated not just for doing their named job, but for exceeding expectations while advancing the corporate goals. To align everyone in the organization in exactly the same direction is a task, one that is a powerful driver for growth. People should be compensated well for such outstanding contributions.

What is the general rule for such a bonus plan? Provide no more than five key performance indicators derived from the strategic plan and fitted to the specific job of the manager. Set time-based goals for each. Provide bonus opportunities that add to approximately 50% of the base salary if all are achieved within the year. Meet and measure progress truthfully each quarter. Perhaps pay a portion of the bonus upon completion of these meetings. Do not make the usual mistake of ignoring or passing on the progress of any of these items by just paying a part of the bonus at yearend because no-one carefully reviewed progress, or because circumstances changed and the bonus item could not be completed as written.

Incentives are powerful tools when used well and reviewed often. They are a major part of a good manager’s work and should be treated as such by the CEO and all senior managers.

SOURCEBerkonomics
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Dave Berkus
Dave Berkus is a noted speaker, author and early stage private equity investor. He is acknowledged as one of the most active angel investors in the country, having made and actively participated in over 87 technology investments during the past decade. He currently manages two angel VC funds (Berkus Technology Ventures, LLC and Kodiak Ventures, L.P.) Dave is past Chairman of the Tech Coast Angels, one of the largest angel networks in the United States. Dave is author of “Basic Berkonomics,” “Berkonomics,” “Advanced Berkonomics,” “Extending the Runway,” and the Small Business Success Collection. Find out more at Berkus.com or contact Dave at dberkus@berkus.com

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