Successful product manager incentive compensation plans are very challenging to design and implement. Bonuses, or other forms of incentive compensation, are intended to motivate individuals and organizations to achieve key goals and objectives. Incentive compensation plans are one of the ways that enterprises express their value and priorities. Regrettably, most product manager incentive compensation plans fail to do that. Bonuses tend to fall into the category of ‘it’s nice to have’ but they rarely inspire product managers to perform at the highest levels. This post reviews product manager compensation basics, alignment, and suggested best practices.
Product Manager Incentive Compensation Basics
An annual survey from the Pragmatic Institute does a good job of painting a picture of product manager compensation:
- 81% of Product Managers Eligible for Bonus
- Average Annual Base Salary: $105,400
- Average Bonus: $14,800 (14% of base salary)
- Factors for Calculating Bonus (% Bonus Eligible
- 89% Company Revenue/Profit
- 61% Personal Objectives
- 34% Product Revenue/Profit
- 5% Market Visits
- 9% Other
Around 60% of product managers are eligible to receive some type of equity like stock options or restricted stock units. While stock options were once offered the promise of a big payoff when an IPO or an acquisition occurred, the reality is that the days of hitting the stock option lotto are gone. A great piece in Medium by Angel List — The Liquidation Preference Effect -Your Equity Could Be Worth Millions — Or Nothing does a great job of describing the reality of equity compensation in today’s market.
Some other challenges for product manager incentive compensation include:
- Low Leverage. Most product manager incentive compensation plans represent a small fraction of a product manager’s total compensation. With only 15% of compensation ‘at risk’ there is not a tremendous amount of motivation for an individual product manager to go above and beyond the call of duty.
- Total Incentive is Capped. Bonus are most often ‘capped’—they cannot exceed a fixed amount of percentage of base salary. Typical product managers cannot overachieve their targets and get higher incentive payouts.
- Bonus Factors are not Aligned with Other Bonus Eligible Employees. The factors that are used to determine product manager bonus awards are often not aligned with the factors that drive incentive compensation for executive management and sales.
Product Manager Incentive Compensation Alignment
It is unfortunate but the factors that drive product manager incentive compensation are rarely aligned with the factors that drive executive or sales incentive compensation.
Consider the following chart which describes the incentive compensation package for Larry Ellison, the executive chairman of Oracle:
An individual product manager is probably not going to be in a position to impact Oracle’s stock price, market cap, or total cloud, SaaS, PaaS, IaaS revenues or gross margins. The executive who report to Ellison, however, will be highly motivated to achieve Larry’s goals because their incentive compensation is very likely to be directly tied to Larry’s. If a product manager is seeking executive support for an investment or a prioritization decision, it had better be aligned with these types of incentive compensation factors.
For most product managers, sales incentive compensation has a more frequent and direct impact. Consider the following incentive compensation plan for a SaaS senior account executive:
Here are a couple of key observations:
- Leverage. Base salary only accounts for 55% of total compensation of on target earnings. A significant portion of a sales rep’s compensation is at risk and dependent on performance
- Incentive Compensation is not Capped. There is no cap on incentive compensation. If a sales rep exceeds quota they keep getting incentive payments
- Commission Rates Rise with Over-Performance. Commission rates are tiered, but once quota has been achieved, commission rates increase to 15%, almost double the rate for the first commission tier. Getting into ‘accelerators’ can drive significant sales performance
- SPIFFs. The SPIFF for financial institution wins is an indication that the enterprise values new financial institution wins, but only to a certain degree.
One of the challenges product managers regularly face is the need to accommodate the priorities of high performing sales people. As the comp plan illustrates, sales people have significant incentives to overachieve. If winning a deal requires the delivery of a customer-specific feature the sales person will apply significant pressure on the product manager to do so, regardless of the feature’s impact on the overall roadmap and product. A promise that the feature will be delivered in the future will not suffice. That would introduce a contingency into the deal which would not allow the revenue to be recognized. Typically that would result into a deferral of the commissions until the contingency was removed. Agile practices also introduce challenges since most Agile teams deliver frequent iterations of working software, the re-prioritization of backlog items to accommodate sales priorities is common, and in fact encouraged. Product managers that disappoint top performing sales people can suffer significant reputational and career advancement risk.
Product Management Incentive Compensation Best Practices
There is no single incentive compensation model that is the best fit for product managers. Each program needs to be tailored to fit the needs, economics, and culture of each enterprise. There are some best practices, however, that can help the enterprise have a better chance of achieving its overall goals.
Introduce More Leverage into PM Compensation Plans
As noted earlier most product manager incentive compensation plans have low leverage – an average of only 14% whereas a typical sales executive has over 50% of their on-target compensation at risk. Higher leverage translates into higher motivation to outperform. Typical product managers should have leverage ratios of 25%-30%.
Un-Cap PM Incentive Compensation Plans
Product Manager comp plans should not have hard caps. If performance exceeds planned targets, product managers should share in the over-performance, just as most executive and sales compensation plans allow.
Bonus Factors Tied to Overall Company Goals
The factors that are used to calculate bonus payouts should be tied to broad overall enterprise goals that are shared by as many bonus eligible employees as possible. Very few enterprises track and report individual product line revenues and profitability so it is not reasonable to compensate individual product managers on financial performance that is not reliably tracked.
As noted in the blog entitled Are Product Managers the CEO of their Product or Not?
Product managers are not General Managers. Product managers inherit constraints from other parts of the business. They do not determine how many developers work in the organization or on a specific product. They do not determine how many quota carrying sales reps there are or how their quotas and sales compensation plans are set. They do not determine what the operating profit margin or EBITDA targets are.
Product managers inherit constraints that are set by the CEO or other executives in the company. A core challenge for product managers is to use their influence to optimize how all parts of the organization work to achieve the product and company’s goals.
As contributors who seek to optimize how all parts of the enterprise operate to achieve the overall goals, product managers should be judged on total company performance.
Supplement with Non-Financial Rewards
The old phrase “Money talk – bullshit walks” is certainly true when it comes to incentive compensation, but market leading organizations recognize that there are other ways to recognize product managers that can supplement (but not replace) cash or equity compensation.
One example is sales club trips. Most sales organizations offer a special trip for sales people that achieve 100% of their sales quota. Usually these are extravagant affairs in exotic locations. Inviting the top performing 5% of product management personnel is an excellent perk. Not only do they deserve the reward, but it will enable them to build more effective personal relationships with leading sales personnel and executives. Many market leading organizations extend this perk to other departments such as customer services, operations, and finance.
Another example is the introduction of a Technical Ladder program, patterned after Texas Instrument’s very successful program:
The Tech Ladder recognized that not all employees want to grow in a company by climbing up the management ranks. The Tech Ladder is a parallel growth track for its engineers who get recognized for their technical contributions and receive mentoring and support to grow into technical leadership roles. TI’s technical ladder is not unique, others like Bell Labs, Intel and IBM offer similar career progressions. TI is considered to be one of the best programs in the industry. It is exclusive, no more than 22 per cent of TI employees can be a part of the technical ladder. The distinguishing feature of Tech Ladder is that it is not decided by the management, but is a peer evaluation process. Only members of the Technical Ladder can vote in new members. Regular management is excluded from the process. Candidates were assessed on innovation in products leading to business impact, how the person helps to grow the technical pool in their team, whether they have mentored and helped others grow technically and, how the person has contributed to enhancing TI’s image in external environment like industry and forums.
Product Manager Incentive Compensation is a complex topic. For most product managers, incentive compensation is a ‘nice-to-have’ thing, but it rarely inspires above and beyond performance. Poorly designed comp programs can introduce conflict between bonus eligible employees. Highly effective programs understand how product management performance benefits the entire organization and recognize that the combination of cash and non-cash components can inspire outstanding performance.