How to structure executive bonus plans
October 27, 2026 | Edition #35
Dear People person,
Company leadership cast a long shadow.
They make decisions that impact the future of the company and tens to thousands of employees', customers', and shareholders' lives.
For that reason, it's not only important to hire the right leaders, but also to compensate them in a way that aligns their interests with the company's interests.
We've previously talked about setting base compensation using benchmarks as well as equity incentive plans, so we won't touch on those again today.
Instead, our star will be the Executive Incentive Bonus Plan.
When and which executives have incentive bonus plans?
​Most Series C or later tech companies have Compensation Committees.
These committees oversee executive compensation, including performance targets, annual incentive bonus plans, and material custom executive agreements (e.g., guaranteed severance packages).
Participation in these bonus plans is often based on level (e.g., VP to C-suite) and role (e.g., Chief Revenue Officer is more likely than Chief People Officer).
For public behemoths like Amazon, you can see executive compensation details for Named Executive Officers (NEOs) in S1 filings.
​Here's an example from a recent tech IPO, Service Titan (see p. 167-8 of the filing).
How do you structure an executive incentive bonus plan?
​Executive bonus plans tend to be based on company performance.
In particular, they have some incentive for growth (e.g., ARR, revenue growth rate) and a control for profitability (e.g., >10% EBITDA).
This is to prevent executives from simply buying growth (e.g., spending an exorbitant amount on Paid Ads) in an unsustainable, short-term manner.
A classic example is to have an achievement table, where the size of the bonus pool increases as you hit higher revenue thresholds, but only if you hit a specific profit-margin.
You can also have variations on this that use revenue and profitability (or efficiency metrics if you are not profitable) as independent levers where both have an impact on bonus payouts (e.g., earn more if profit is higher).
How do you set each executive's bonus target?
​As always, there are a lot of options here. Which one is right for your organization depends on your goals.
But, for the sake of simplicity, I'll cover two common models:
- % bonus target as a % of base salary by job level
- % of variable bonus pool by job level
One of the downsides of Option 2 where you have a share of a variable bonus pool—or a pool that goes up and down based on revenue/profit perofrmance—is that it can create a disincentive for Executives to want to hire and/or promote other Executives within the plan year as that dilutes their payout amount.
Whenever you're designing a bonus plan, you need to think through:
- What are you intentionally incentivizing with this plan? Is that clear?
- What are you unintentionally incentivizing with this plan? How bad is that behavior? What can you do within or outside the plan to reduce the likelihood of that behavior?
When do bonuses make sense for other roles?
​Bonuses make a ton of sense for revenue influencing or adjacent roles, like Business Development Representatives (BDRs), Customer Success Managers (CSMs), and—in some cases—Marketing.
Beyond that, individual or company bonus plans start to get really complicated really quickly.
They are difficult to administer and, if poorly designed, can be a disincentive because they feel out of reach.
If you want to learn more about when and how to use bonuses across the org, listen to this 13-minute podcast between me and a leading Australian compensation expert, Matt McFarlane.
And, if you want a referral to one of the 3 compensation consultants I recommend for startups, feel free to hit reply and let me know.
Closing Thoughts​
As we head into November, I'll be kicking off my Black Friday sale. Keep an eye out for discounts on one of my most popular digital products, as well as limited opportunities to work with me one-on-one.
10% of all revenue generated from the Black Friday sale is donated to charities like Habitat for Humanity (affordable housing), NatureBridge's Armstrong Scholars (women's access to the outdoors), and Promising Pages (childhood literacy).
Until then,
Melissa
P.S. As always, this newsletter represents the opinions of one People person. It should not be construed as legal or financial advice. If you have questions about executive incentive plans, consult a qualified professional.
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