4 Steps to Align and Incentivize Your Management Team for Business Success
Running a successful business is challenging. Many details need to be aligned and performed well to result in a successful business. Business operation is like a complex machine with many parts that must function and operate well to drive success. If each senior manager in your team is responsible for part of that machine, how would you align and incentivize them all to achieve the business goals?
As a CEO and CTO of large operations, I have seen and tried many models throughout my career. I have learned that complexity is the enemy of productivity and success. It would be best to find a simple and easy-to-understand model that will not create conflicts across your team and will be clear enough for everyone to understand without a Ph.D.
One classic mistake is not setting goals and not incentivizing people for success. However, the more common mistake is giving each manager different goals and setting incentives once achieving them. Why a mistake? Because business goals are not a result of any individual’s hard work, it’s teamwork. Having your Marketing leader focused on achieving marketing’s KPIs or having your Product leader just pushing new features and releases will likely not make your business successful. Things are interdependent. It is not just your leadership team’s collective responsibility but the entire team at all levels. How would you align and incentivize them all?
Before considering incentives and alignment, list your business’s leading indicators. These quantifiable measures indicate how well your business is progressing toward a goal. Focusing your team to impact the leading indicators will eventually lead to an impact on the lagging indicators.
I used to track more leading indicators than I should have. Focusing on 3 or 4 indicators should be enough for this purpose. Otherwise, people may need clarification or help to achieve all of them.
If you run a SaaS business, focus on Net-new-ARR, Gross-dollar-retention, Net-dollar-retention, and one more unique indicator to your vertical or region. It can be gross profit margin, net cash flow, or EBITDA. Just stay within four.
Each team member should know how they can impact these indicators. For example, Marketing & Sales with the help of Products should greatly impact net new ARR if they collaborate.
If Marketing focuses on MQL and SQL while Sales focuses on winning business and the Product pushes more features out, you will likely not see the expected impact.
On the other hand, if Marketing and Sales are aligned on pipeline creation targets, and the Product team is focused on delivering value that customers are adopting and using daily, you will likely achieve these targets.
Given the leading indicators you decided to use, let’s set the incentives right. While Sales is incentivized by the amount of new ARR they win, the rest of the team — the non-quota-carrying people — should have a scheme that rewards the achievement of goals.
Generally, each leading indicator should have equal weight in the overall achievement score. In the case of three indicators, each will have 33%. However, you can decide to offset some indicators to drive more impact on specific indicators. At the end of each month or quarter, you should calculate the achievement score and share it with the team, so they will know where they stand. The achievement score would trigger incentives only if the team achieves at least 70 or 80%. Below that, incentives should only be paid in case of a special reason.
Transparency is key to the success of this model. You should share the data about the indicators you regularly use, in good and bad times. Transparency leads to trust and leads to camaradity across the teams. This is exactly where you should lead the team’s dynamic.
While your leadership team, C-level and VPs, should have 30% of their total compensation attached to the achievement score, Directors should have about 20–25%. The rest of the team, the non-quota-carrying people, should have 10%. The logic is simple, the more senior you are, the more impact you have on the selected indicators.
You can also allocate managers a discretionary bonus budget to reward individuals in their team that positively contribute to the business and goals.
When you look at compensation benchmarks online, you usually see the On-Target-Earning (OTE) number. It means, the amount paid if all targets were achieved above 90%. You should split the compensation package into Base + Variable (achieved per the indicators you set), per the table above. For example, for a Director at $180k OTE, you should set a $135k base + $45k variable. You may want to allocate some equity from your ESOP as a long-term incentive, with a four years vesting and one-year cliff.
Running a successful business requires alignment and collaboration across the entire team, especially at the management level. The four steps to help align and incentivize your management team for success. First, identify leading indicators and set clear goals for each manager. Next, customize incentives based on each manager’s unique role and what motivates them. Third, foster collaboration and teamwork among the management team. Finally, provide regular feedback and recognition while keeping goals and incentives simple and easy to understand. By following these four steps, you can create a culture of success and drive your business forward.
Written be: Yuval Ben-itzhak
