Designing Incentive Compensation

By David Hehman, Posted 01/06/09     Add your comments

Here’s a way to get you excited about paying out bonuses…tie them to exciting goals.

Hiring great people is the beginning of a successful business. Your next goal in leading your team is to create a structure of compensation that motivates success. Here are some of Spartina’s principles, which will help you get excited about paying bonuses:

  1. Tie the bonus to near term (monthly) goals that you’d be thrilled with hitting.
  2. Pick the metrics that matter: revenue, profit, new sales
  3. Tier the payouts. That is, tie the bonus to a stretch beyond a goal, but make sure that it is reachable
  4. Insure that the goals/bonuses are ratcheted upward each month

Here’s an example of aligning a bonus structure with immediate goals, for a sample month:

Metric Goal Bonus
Revenue $18.5K $250
$20.5K $250
New Subscriptions 330 $250
350 $250
Profit $-5K $500
Breakeven $500
Overall Potential bonus $2000

For whatever bonus levels are achieved, replace them with new ones at the start of each month.

Overall, a carrot is always better than a stick, and in the case of setting great goals, everyone gets the reward.

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