A customer recently asked:
I have a pressing question about incentivizing a product manager that I have.
We are neither for nor against bonus programs but surprisingly they may actually de-motivate by encouraging the wrong behavior. Think of the development team that introduces bugs so they can get compensated for removing them or the sales plan that encourages deals that benefit only the salesperson and not the company.
Nonetheless, 80% of product managers and marketers receive a bonus, about 10% of base salary. These are typically based on company profit (67% of survey respondents), achieving personal goals and objectives (37%), and product revenue (26%). (See more on product management compensation at www.pragmaticmarketing.com/survey)
One question we often hear is Shouldn’t I bonus product managers on profit & loss? But the product manager who is paid on P&L may ask, Can I outsource development if I don’t like the cost or time estimate? or If I’m responsible for P&L, I’ll need authority to reject contracts for excessive discounting. Although the idea of P&L responsibility seems logical, the ramifications have a significant impact on business decisions.
Another popular idea is a plan associated with product revenue. But is supporting deals one-at-a-time what you want from your team? And do you want your team carefully selecting which salespeople to help, the one most likely to close a deal? In other words, this product revenue approach often leads your team to provide support to the salespeople who least need the help.
In reality, compensation based on this years product performance tends to focus product managers on tactical items. Pay me on revenue and I’ll go on sales calls and do more demos.
One technique for encouraging a more strategic view is to compensate for the activities this year that result in better product performance next year. It’s tricky though; how do you pay for next yearÕs results? How do you measure next years profit?
Jeff Bezos of Amazon said, If we have a good quarter it’s because of the work we did three, four, and five years ago. It’s not because we did a good job this quarter.