Ep. 429: Link Variable Compensation To Desired Outcomes

Too few CEOs fully leverage the power of variable compensation to drive desired employee behavior and outcomes. Last week we discussed the AI CEO vs. the Cyborg CEO. Assuming we could build a CEO with perfect intelligence there remains the question of how that CEO should communicate with his/her direct reports and employee base so as to achieve desired outcomes. For example, we structure M&A deals with detailed incentive compensation plans for acquired management teams. Those incentive compensation plans may incorporate various elements such as future Revenue and EBITDA levels, product launches and customer retention rates. Conversely, it is rare for a CEO’s direct reports to have that level of achievement-based detail built into their variable compensation plans. For example, in the case of a significant technology product launch it would make sense for a percentage of variable compensation to be at risk as it relates to those who worked on the budget, the product build and the product launch. Those with variable compensation at risk may include Product Managers, Software Developers, Sales Executives, Marketing Executives and Finance Executives. If you really want to go the extra mile, variable compensation for those employees would depend upon product performance over a defined period. “Product performance” could be defined as unit sales vs. budget, unit pricing vs. budget, and customer satisfaction (once the product has been deployed for a sufficient period so as to reasonably be able to conduct customer surveys). As the saying goes, “show me your compensation plan and I’ll predict your employees’ behavior.”