Product management bonus programs

By Pragmatic Institute August 10, 2007

The typical product manager gets a cash bonus each year, yet most do not find their bonus particularly motivating (see our Roles and Compensation surveys). The problem is that the bonuses are based on factors that are out of product management's control. The typical bonus program is based on one or more of these variables: company profit, product revenue, and personal objectives. Yet fewer than 10% of product managers report these bonuses are extremely motivating. There's a simple explanation.

First, let's explore how most bonus plans are structured.

Company profit. Many plans have a financial factor based on company profit. The obvious logic is that we all contribute to the profitability of the company. In fact, product managers can contribute more than many others by defining and delivering profitable products and upgrades. Yet this doesn't motivate product managers. There are so many factors affecting corporate profit that it's hard to connect one person's contribution to the overall company profit. And besides, it's hard to worry about being 'penny wise' when all around you are being 'pound foolish.'

A variant on this approach is to focus on the profit and loss of a single product. Yet how realistic is it to expect one person to be accountable for profit and loss when the revenues and costs are under the control of others?

Product revenue. Paying variable compensation for revenue associated to a product manager's product seems a good idea. While a product manager may not be able to affect overall company profits, surely a product manager affects product sales. But the typical bonus is not really based on revenue; it's based on quota attainment--a number the product manager rarely sets. One product manager calculated a realistic product revenue forecast of $18M. But his boss saw the number and said, 'That's way too low. I think you can do? hmmm? let's say? $40 million.' The new number was so completely unrealistic that the product manager knew it could not be achieved. And sure enough, he didn't receive a bonus at the end of the year, despite the product's revenue of $18.3M. No wonder the bonus didn't motivate. This factor is not about revenue, it's about attaining a quota number.

But what if the bonus was truly based on revenue? What if the product manager received $1000 for every contract? Or 3% of product revenue? What would this bonus plan encourage? The revenue-based bonus encourages product managers to become sales engineers--to go on a lot of sales calls. And not just any sales calls, but only calls with the 'best' reps. The revenue plan insists that product management spend time with the winners and to ignore the losers.

Personal objectives. One of the most popular programs with product managers is the objectives bonus, largely because the result seems in the employee's control. Sometimes called MBOs (for Management by Objective), the employee and manager agree at the beginning of the quarter which objectives will be achieved by the end of the quarter.

One VP used to request a current resume from each employee and together they would add objectives to the existing skill set. In effect, they would define the skills that should be on the resume, and then put together a plan to make it so. This is actually a healthy managerial exercise for grooming future leaders of the company.

Unfortunately, many product managers short-circuit this program by only agreeing to objectives that are already nearing completion. And some managers derail the program by making it subjective, giving a fraction of the agreed-upon bonus to an employee despite fully achieving the objective.

A good rule of management is to never surprise employees in their paychecks. An expected bonus of $1000 should not be arbitrarily reduced to $689. Revenue and profit numbers should be communicated throughout the year so that employees with a profit-based bonus have an accurate view of the company's performance. An employee who expects an increase in salary only to find that they are in danger of being fired is either extremely unrealistic about his performance or simply has a bad manager.

Research has shown the company profit, product revenue, and personal objectives don't motivate product managers. In fact, there is additional research to suggest that bonus programs never motivate. As a result, some companies have stopped paying bonuses of any kind, including commissions on revenue to sales people. But regardless of whether bonuses are effective or not, most product managers are on a bonus plan.

Messenger for the market

In the absence of intimate market knowledge, product management is relegated to supporting development, marketing, and the sales channel in a reactive mode, doing whatever it takes to help those other departments. Successful product management organizations hold product managers accountable for the business of the product. That means knowing the market intimately and reporting market data back to the various stakeholders in the company. The first step is to report market data to the execs in a business plan. We need to find problems and then quantify them, so we know that solving the problem results in a profitable business.

Once the plan is approved, we report the problems to development in the form of requirements. Ideally, they should have adequate business savvy to understand the requirements and build a product to solve the problem. When the product is complete, we take the problems to marcom (in the form of positioning documents) to communicate our solution to the market. Finally, we teach the sales people how to sell the product, again using the problems that started the whole process.

So the key skills for a product manager are:

  • A basic understanding of technology including our company's specialty.
  • The thirst to acquire market knowledge (meaning, wants to travel to existing customers and potential customers without a sales person).
  • The ability to identify market problems through observation.
  • The communication skills to report market data to execs, development, marketing, and sales.

Given this profile, what variables make sense for a company that wants to have an effective bonus program? To be an effective messenger for the market, product management must continually visit both existing customers and potential customers. Therefore we should bonus product managers on a simple metric: make calls; make money.

Suppose a product manager gets $4000 per year in bonus money. An appropriate bonus structure is $1000 per quarter for ten documented visits without sales people to existing and potential customers.

Bonus Compensation

Quarter Calls Amount
1 10 $1000
2 10 1000
3 10 1000
4 10 1000
Annual 40 $4000

Visiting the market is the most important activity for product management and an activity that the rest of the company seems to try to prevent. This bonus plan is absolutely under the control of the product manager. She can complain that her schedule was too tight or that she was busy answering emails. But you don't get bonuses for answering emails; you get bonuses for visiting the market.

One shortcoming of the program is that it is activity-based rather than results-based. But the benefits of being objective and being under the control of the product manager overcome the negative.

Companies spend enormous sums on various bonus programs yet don't see changes in employee or product performance. To be motivating, the bonus must be clear and measurable, and under the control of the person being managed. The '10 calls for $1000' bonus plan meets these objectives.

Pragmatic Institute

Pragmatic Institute

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