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Charlie Munger famously said, “Show me the incentives, I’ll show you the outcome.”
And he’s 100% right. This is why setting the right incentives for your key employees will be your business's best growth driver.
Today: a simple way to align compensation with objectives.
Let’s do it!
How to align bonuses with your business goals
Why this matters
One key thing to realize:
Your current compensation plan — no matter what — is already driving your business outcomes.
So why not take a few minutes to make sure it’s driving the direction you want?
And it doesn’t require fancy software — just a clear plan and a simple spreadsheet. (I’ve linked my template at the bottom!)
Step 1: Define your goals.
Start by clarifying what you, the owner, want to optimize for.
Do you want fast growth? High profitability? More cash in the bank?
Your goals should guide the structure of your plan. For most owners, the right balance is a mix of growth and profitability.
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Step 2: Determine On-Target Earnings (OTE).
Decide what your key employee should earn if they hit all their goals. Then, work backward to determine how much of that OTE will be base vs. bonus. (e.g. $150K OTE with $50K in bonuses.)
Senior roles are usually tied more to performance. Junior roles should have more guaranteed.
Step 3: Split the bonus into financial and objective goals.
Reserve a bonus for goals that aren’t revenue—or profit-based. This lets you tailor the plan to your business’s needs.
These goals could be team performance, new product launches, or more nuanced financial health goals.
Two notes on “objective” goals:
They often make more sense for junior employees since they’re more removed from impacting the business’s overall numbers.
They shouldn’t outweigh overall financials—I only set aside about 30% of the total bonus for objectives. (You don’t want to pay out if the business can’t afford it.)
Step 4: Make bonuses percentage-based
Don’t make your bonus targets hit or miss. Assess on a sliding scale, then award a percentage of the available bonus amount.
This is easy for financials. Discuss objective goals with the employee, other senior staff, and the board as necessary, then decide what percentage of the goal they accomplished.
Step 5: Sum it up and share the plan.
Your newly tailored compensation plan only works if your employees know about it.
Walk through each employee’s financial and objective goals with them and answer any questions they might have.
Then, regularly, revisit what worked and what didn’t work about the plan and tinker as necessary.
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Want an easy spreadsheet to plug these numbers into?
Here’s my CEO compensation guide — there’s a link to the spreadsheet I use.
That’s it for this one. Thanks for reading.
Michael
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