Hiring & Retention

Your Variable Comp Plans for ’15. You Probably Need More of Them.

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Jason Lemkin

Hopefully, sometime over the next few weeks, you’ll finish up your 2015 model and planning. ¬†If not, please try to do it before 12/31 … ūüôā

I’m working on this with several companies I am involved¬†with.

BigBonusCheckFlowChartMy #1 suggestion is this — try to have every single employee that can materially influence revenue have a variable revenue component.

I know we all agree everyone in sales has to have commissions and a highly variable comp structure. ¬†More on why here. ¬†But — I mean everyone that materially impacts the plan should have some variable comp.

By that I mean:

  • Your VP Product should be incented to build the right features not only to Make a Great Product — but also hit the ’15 plan. ¬†How about a 15% variable cash component? ¬†A 15% bonus for exceeding the plan — and also perhaps some downside for missing it.
  • Your VP Marketing sure better have her comp plan tied to the leads or opportunity commits that make the ’15 plan work. ¬†How about a 20% variable cash component? ¬†The leads aren’t there, she comes up short. ¬†But if the plan is blown out, she shares in the extra revenue.
  • Your VP Customer Success sure better have her comp plan tied to hitting the upsell, retention, or negative net churn goals. ¬†How about a 30%+ variable component? ¬†Watch him sweat the lost customers 10x more when money is on the line.
  • Your VP and Directors of Engineering need to build the stuff we need to hit the¬†’15 plan. ¬†How about a 10-15-20% variable comp plan here?
  • Your Controller exceeds our collections goals, and you end up with an extra $300k of cash in the bank? ¬†How about a bonus here?

“Nah, my Director of Engineering doesn’t need variable comp” you say. ¬†We’re all in it together. ¬†She’s got plenty of equity.

Maybe.

But if nothing else, even for non-sales professionals, revenue is a clear team goal everyone can and should get behind. ¬†And paying for performance is just something all of us sort of viscerally understand, even if we’ve never carried a bag. ¬†We hit the ’15 plan together, you get a pat on the back, your equity is worth more, That’s Great. ¬†But if you get another $20k¬†— just watch how people change. ¬†Maybe it doesn’t change the life of some of your senior hires. ¬†But if the reward is $0 — but appreciation in equity — you just won’t get the same alignment to your ’15 revenue plan.

Later, this may get harder. ¬†Later, you may need subordinate goals. ¬†But for now, I’d suggest tying a bonus plan for ’15 to exceeding the ’15 revenue plan for all your key hires, of every discipline.

Let me share two anecdotes.

Recently, I went through this exercise with an amazing company I work closely with. ¬†We added a variable component to the VP of Engineering’s comp plan. ¬†If we missed the ’15 plan, his salary dropped by 10%. ¬†If we hit it exactly, he got a 5% bonus beyond base. ¬†And if we exceeded it by 10%, he got a 20% bonus.

About 15 minutes after that, he came back. ¬†And completely changed the product roadmap for ’15.

Now, you might argue that’s a mistake. ¬†Too much focus on the short-term over the long-term. ¬†Maybe. ¬†But … at least it creates alignment, a debate, a discussion. ¬†A new sense of shared focus on really, truly, hitting the ’15 plan.

I had a similar experience myself, personally.  Back during our Year of Hell, I waived all my salary.  I worked for no cash (though I took equity instead) for about a year after we raised venture capital.

And then, in the depths of the Lehman Brothers the-world-is-over-Sequoia-Says-Good-Times-R.I.P. days, I did something I was pretty proud of.  I got up off the Mac and got 2 customers to prepay an extra $600,000 in cash upfront.  When there was no contractual reason for them to do so.  At a time the world was ending.  Considering our net burn rate was low, this bought us another 9 months of runway.

So I asked for a $10k bonus.  My salary was $0.  But I needed the bonus.  I brought in the money.  I needed a tangible, real pat on the back.  In the way only a check can do.

It was a confusing discussion with the investors. ¬†You need a $10k bonus, but you’re waiving your $120k salary? ¬†Huh? ¬†But I needed it. ¬†To connect my efforts to hit the plan, the $600k extra I brought in when the world was ending … with the plan itself.

So does the rest of your team.  They need it too.

Not just the sales guys.

….

awesome bonus chart from here

Published on November 20, 2014
  • conradov

    Thanks for another timely and accurate advice. I have been thinking about variable comp for devs and even administrative assistants. Won’t miss the opportunity in 2015.

    And congrats on that $10k bonus. You deserved it!

  • First off, hands down your blog is one of my absolute favorites.. Question, do you happen to have an example excel file for these sorts of comp plans? I’m thinking of implementing this for my entire team (VP Product / COO / VP Marketing), currently VP Sales is tired to revenue so good there… but I’m wondering do you pay out bonuses quarterly? Monthly? Do you sit down with your team to agree on a goal together?

    • i need to work on excel. I paid bonuses monthly. you might as well. later, quarterly is less complex, but not really in the early days. but it doesn’t really matter. for my VPS’s, the target was always the ARR goal for 12/31. i paid the bonus based on hitting the monthly interim goals in the plan.

  • How do you keep this from being gamed though?

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