What Is A VP Worth?

Compensation and Profit-sharing are two topics that the #CLoTribe has asked me to answer pretty much since the beginning. Done well, they are crazy incentivizing. Done wrong, well, down right depressing.

Leadership, Business

Chris, what percentage do you recommend for the P&L comp plan for VP/EVP’s running a division or department?  I understand that the “parent company” or company owner would likely get part of the group’s profit and the VP/EVP would get part as well.

And that the VP/EVP’s comp plan would basically be solely based on the profitability of his/her group… but I don’t have a good idea of what to set the percentages. 

I absolutely love this idea and any help would be very appreciated! – Luke

Luke, I’m not your father, but I believe there are two ways to pay VP’s/EVP’s –

  • Profit-sharing (Not retirement, actual sharing from the profits.) – If they are running an area without P&L responsibility, then I would pay them a decent salary, and a percentage of the net profits. When I say decent, I mean possibly not even market value so the profit-sharing is an incentive. Depending upon the way things are set up, they might not even know for sure what that percentage is that they get paid. Chances are you won’t have that weird of a set up that they won’t though.
  • P&L Percentage – If the VP/EVP is in charge of a P&L, then it’s reasonable to pay them off of the bottom line. They may not make the greatest salary ever (like, really low, but they should be able to eat…cheaply), but their percentage of the “net” profit could be as high as 25%. Heck, if it’s a start up, maybe it’s even higher. Essentially you are asking them to run a business for you. However, if they are stepping into a business with a track record, then give them a baseline to hit before being paid. 

While they sound stunningly similar, they actually aren’t. If you give me P&L responsibility, then I’m looking out for all of the sales, and ALL of the expenses. Which means I have access to my, and only my, P&L. I’m running a mini business for you that involves all aspects outside of just a sales team. I’m responsible for ALL sales, expenses, admin, hiring and firing, vendors, etc.

As a P&L leader, you’re asking me to take the risk with you by paying me a smaller salary. Therefore, I need some digits when we succeed baby. Hook a brutha up. Or sista if you’re…well…a sista.

Question: What are the “Pros and Cons” of paying either of the two ways?

Resources:

Adapt or Reinvent?

Adapt or Reinvent part 2?

Setting Up Your Team For Success

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34 thoughts on “What Is A VP Worth?”

  1. Both of these methods seem like reasonable methods of payment to me. Obviously, you want your employee to make enough base salary to survive, but you want the success of the company to be a huge incentive for the individual to drive results. I’m not a VP; however, as a manager in my company, I have key targets to achieve which directly impact my year-end incentive.

      1. In a way, the annual incentive provides a more sustained focus. Knowing that the year end payout depends on the year long performance keeps our management team moving at a higher level consistently throughout the year.

        I sometimes wonder if the overall business would raise the bar if more employees were partially paid based on annual incentive.

        Definitely lots to think about here.

        1. Hmmm. That’s interesting. Most of my experiences were based on a monthly or quarterly bonuses. I know I just have “squirrel syndrome” and a year is a long ways a way. I guess it depends on how often you are reviewing goals and keeping the squirrels focused. 😉

        2. I’ve worked under a situation where the mid-level managers were on an annual bonus scheme, but the team members were on a monthly bonus scheme.
          This seemed to work well for us all–I was one of the annual bonus folks–but I have little experience with any other type of bonus arrangement.

  2. “Luke, I’m not your father” – HA!

    For both, it requires that someone cares – a lot – for the business. It requires that an extreme work ethic be there. It will weed out the weak (you know the ones that fall for the Jedi mind tricks). It will keep and motivate the strong ones.

    I actually think that business would do better if they adopted these in all areas. I’ve worked with a lot of people that don’t really care and are there for just a paycheck. If the paycheck was lower but with a profit-sharing incentive, they would be motivated to try harder.

    I never worked in either situation before, but I’m starting to get a feel for it as I start my business. There is a direct correlation between the work I do and the certificates (money) I receive.

  3. Chris, here’s a follow-on question: When do you consider paying your incentives? Just at year-end, or possibly quarterly? Monthly? Under what circumstances might you consider increasing the frequency?

  4. Both methods sound reasonable to me – since you would be rewarding different levels of responsibility. And yes, there’s a difference between bringing the P&L up to exceptional levels and stepping into a situation that is already good. Definitely makes you want to work harder to get those extra dollars.

    When I was at Borders, we got incentives for hitting markers like customer satisfaction, profitability, overall sales, etc. and then if you hit all of them, extra bonus. You think I worked hard to beat those goals? You bet! Felt like I got a pay cut when the bottom started to fall out and the bonuses stopped.

    Great post Chris – and such a clear explanation.

  5. I really don’t see any other way to pay people in those positions. In my ~12 year work career I have had 5 jobs. I was paid in 5 ways:

    1. Straight salary. Lasted 10 months there. No incentive. We never talked about results. Leader was passive aggressive type who ended up firing me for underperformance when I had no idea I was underperforming.

    2. Small salary + commission. Worked very well for me and employer. I enjoyed the challenge.

    3. Large salary with small bonus. Lasted barely over a year. Leader was great but I had no challenge or push. I left for greener pastures.

    4. Straight commission. This is what I currently do. All of my clients are straight commission. And I love it.

    5. Same as owners with small base. This was actually my favorite. I got a small base to pay rent, health insurance, food and gas and I got a car. Otherwise, I was paid what the owners were paid. If we had a great month, we made a lot. If we had a bad month, I didn’t get much more than my base. It is a great way to bring someone on board with functional ownership. early on, I was scraping by. Later, I was doing very well.

  6. After reading Matt’s comment I had an “aha” moment. Being on commission would scare the …er… scare me a lot. This tells me that depending on their personality profile, some leaders will be more comfortable with one model over the other.

    1. Yep, totally agree Lily! I’ve been in commission jobs and non-commission and my motivation just wasn’t tied to the dollars. It meant much more to me that we were succeeding as a team and rocking things for the customer than whether or not I made bonus.

      I’m a High C with strong D & I. fyi-

    2. I will admit I have tempered that a bit since having a daughter and a wife who stays home (i.e. no income).

      That being said, I still technically have exactly $0 in guaranteed income each month, but I feel like the risk is lower than ever. If one client sells or goes out of business or needs to cut payroll or whatever, I pick up another one or work more for one. Before, if I got laid off or someone sold, I was out of income.

    3. Bravo, Lily! I’d thought much the same thing.
      Care would need to be taken to determine a person’s DISC profile before even approaching them for a position that might sound financially appealing but which, for them, would be a nightmare.
      I am currently working for a super-high S who cannot, and will never, have the temperament, training, or talent for his position, and it is heartbreaking to watch.

  7. I don’t really have much to say about this. I have very little experience. Here’s what I do know, if you’re going to give them the responsibility, it’s wise to reward them likewise. What I mean is, if you are expecting them to increase sales, or run projects, they should have some skin in the game, ie risk or reward based on the outcome of their objectives.

  8. I don’t think I have much to add here, other than this: have you ever listened to/watched Daniel Pink’s TED talk about motivation and bonuses?

    http://www.ted.com/talks/dan_pink_on_motivation.html

    I’m at the point of THINKING about how to bring a sales person on board…and boy do I struggle with this one a lot – 1. I’m not the best sales person out there, so I’d love to get someone better at it to help me.
    2. The normal sales cycle for us is usually about a year. That makes the idea of a 100% commission position pretty tough to sell. I think I’ll need to go for a low salary + high commission??

    Question: would it be a bad move to do a lower but reoccurring commission plan – or should it always be a one time deal? What have you experienced?

    1. Good luck with the salesman, Aaron. I’ll bet that a conversation between the two of you, once you’ve clarified the type and timing of the compensation you can support, will get you off to a good start. You can always revise as you go, say after 6-months?
      I’ve not seen this TED talk, but I’ve been geeking out on Benjamin Zander (and his TED talk) for days now.

  9. Chris I actually have a question on this I forgot to ask:

    When paying VPs & EVPs from the bottom line, if using accrual based accounting do you recommend adjusting for inventory & depreciation before paying their profit share or after?

    Of course adjusting for inventory increases net profit and depreciation decreases…

    Thanks in advance!

  10. It seems to me that the two ways of compensating a team member focus on the right things for each situation. It places the heart of the team member at the same level as accomplishment of the task(s). I had a boss one time who said over and over “take care of the people and the mission will take care of itself.” Turned out to be true–we’d have followed him into the gates of Hades.
    How do you bring up a person to become the type of leader who will thrive in each type of compensation-situation? I’d love to hear the process you have for training up leaders, Chris.
    I’m re-reading EntreLeadership, so this may answer my question. (Terrific book, BTW, even better the second time around.)

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