Successful product manager incentive compensation plans are hard to put in place. Incentive compensation plans are one of the ways that enterprises express their value and priorities. Unfortunately, most product manager incentive compensation plans fail to do that. Bonuses tend to fall into the category of ‘“it’s nice to have”. They rarely inspire product managers to perform at the highest levels.
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 PMs Reporting)
- 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. The reality is that the days of hitting the stock option lotto are gone. Check out The Liquidation Preference Effect -Your Equity Could Be Worth Millions — Or Nothing. It 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. When only 15% of compensation is ‘at at risk’ there are not many reasons for product managers to excel.
- 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. Product manager bonus awards are often not aligned with incentive compensation for executives or sales.
Product Manager Incentive Compensation Alignment
It is unfortunate product manager incentive compensation is rarely aligned with 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 impact Oracle’s stock price, market cap, total cloud, revenues, or gross margins. The executives who report to Larry Ellison, however, will be highly motivated to achieve his goals. Their incentive compensation is very likely to be directly tied to his. If a product manager is seeking executive support for an investment or a prioritization decision, it should be aligned with these types of incentive plans.
For most product managers, sales incentive compensation has a more 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 the total compensation of on-target earnings. A significant part 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 often tiered, but only once the quota has been achieved. Commission rates increase to 15%, almost double the rate for the first 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.
Product managers often face the need to accommodate the priorities of high-performing salespeople. As the comp plan illustrates, salespeople have significant incentives to overachieve. If winning a deal requires the delivery of a customer-specific feature, the salesperson will apply pressure on the product manager to deliver it. A promise that the feature will be delivered in the future will not suffice.
Agile practices also introduce challenges. The re-prioritization of backlog items to accommodate sales priorities is common and encouraged. Product managers that disappoint top-performing salespeople can suffer significant career advancement risks.
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
Most product manager incentive compensation plans have low leverage – an average of only 14%. A typical sales executive has over 50% of their compensation at risk. Higher leverage translates into higher motivation to outperform. 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 be rewarded.
Bonus Factors Tied to Overall Company Goals
Few enterprises track and report individual product line revenues and profitability. So it is not reasonable to compensate product managers for 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.
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. 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 salespeople 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. 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 percent 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 an 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.
Also published on Medium.