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.
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?