Wouldn’t you love it if your boss asked you this question?  In June, our Input survey asked you to tell us the components of the perfect compensation plan for a product manager.  And you did – we maxed out the limit on our survey responses almost immediately!  Here are the results.

Salary plus variable is the preferred form

Sixty percent of respondents indicated that a bonus based on product revenue, gross profit, or contribution margin is one component of an ideal comp plan.  But combinations of motivators vary depending on size or stage of company, time horizon, and perceived degree of control. Here are some of the comments:

“While revenue/margin/profit are the ultimate measurements  for many of us  especially if in an early stage  these results will not reflect your efforts until much later (probably the next fiscal year)  so it’s also good to base bonuses up achieving goals/metrics that we know are based upon best practices for achieving successful products.”

“The true value of the success of a product is the value (as expressed in $) that it brings to the company / shareholders.  There are many great products that don’t make money and terrible products that do make money – which one do you think a company prefers?”

“Motivation should be based upon factors within your control/influence. Unless you work for a very small company, the impact your actions play on company performance metrics will be miniscule and therefore a disincentive.”

“It provides bonus potential on the two aspects of product delivery; MBOs for getting product released  and revenue/contribution for making the right product.”

Another good way to sum this up is strategy vs. tactics.  MBO’s often force a short-term view, and result in a focus on tactics.  Revenue targets or other product performance metrics can result in a longer-term, strategic focus; or are sometimes very short term.  Why might that be?

Does product life cycle play into this?

While not explicitly mentioned in any comment, reading all the comments together points to one underlying factor:  your perception of the basis for variable compensation is probably influenced by the PLC stage of your product.  If you’re working on new product introductions – pre-revenue – then of course you’d like to be compensated on MBO’s and possibly company performance.  But if your product is in growth stage and successful, then it would be great to be comp’d on top line revenues or achieving market share targets.  And if you’re managing a mature product, compensation based on gross margin, profitability, or customer retention might be just the ticket.

“Bonus/Commission Only” – are these people crazy?

Or just really confident?  Almost 25% are willing to put it all on the line.  This comment says it best:

“Ultimately the Product Manager has the responsibility for the success of the product.  Your compensation should be tied to this success — you’re rewarded handsomely for achieving or exceeding goals (can be rewarded with 100%+ of your target bonus) but you’ll also lose compensation if your products fail to meet expectations.”

The Management take-away

If you manage a group of product managers, you’ll want to work with HR to create a structure for a compensation plan that can be applied consistently across the group, yet tailored to fit each team member.  Factors that can help you tailor the plan include focus on strategy vs. tactics, product life cycle stage, and short- vs. long-term objectives.

The right comp plan is one important factor in both a product manager’s and his/her product’s success. But make sure you support each team member with the skills to achieve that success. Send them to the next Product Management Intensive and watch performance soar!