Startup Executive Bonus Plans

Over the years I’ve seen a variety of bonus and incentive plans for startup executives. Ideally, equity compensation alone would drive the appropriate behaviors to optimize what’s best for the business but bonuses and incentive compensation are commonplace as the startup scales.

In the early years, below a few million in revenue, it typically doesn’t make sense for an executive bonus plan as the business doesn’t have enough repeatability, there are few executives, and it isn’t worth the overhead. With time and success, a bonus plan should be added.

There are a few guidelines I like to think through for a startup executive bonus plan:

  • Keep it Simple
    Too often, I see plans that are overly complex. The main goal of the bonus plan is to drive behavior that aligns with the business goals. Multiple priorities equals no priorities. For an initial plan, err on the side of being too simple and go from there.
  • Target the Most Important Metrics
    While there are dozens of metrics that should be tracked weekly, it’s best that a bonus plan align with 1-3 metrics that are both easy to understand and the most important in the business. For example with SaaS, growth rate is a huge driver of valuation and is a common bonus metric.
  • Counterbalance the Metrics
    Ideally, one or more of the bonus metrics have a counterbalance metric so that the combined results are best for the business. As an example, if growth rate is the first metric, the second (Read more...)