High Performance by Design: Incentive Engineering for Startups and Scaleups

Startups at War with Themselves

Too many leaders cling to the naive belief that their people will always act in the best interests of the organization, regardless of their own personal motivations.

Or assume that simple carrot-and-stick models with a few financial rewards and punitive measures will be enough to keep everyone aligned and productive.

Unfortunately, the reality is far more complex.

Every individual in a company is a rational agent seeking to maximize their own benefit.

They will respond to the incentives in front of them, whether those incentives are intentionally designed or not.

And if those incentives are misaligned with the goals of the organization, the results can be catastrophic, especially in early-stage, high-growth organizations.

The Misaligned Revenue Organisation

Take the example of the typical misaligned revenue organisation in SaaS company.

Marketing is compensated for generating a high volume of leads, even if most of them aren't really interested in buying.

Sales wastes time and resources dealing with these low-quality leads while getting rewarded for closing as many deals as possible.

The result are high-pressure tactics just to get the sale, regardless if the customer needs the product or what their long-term value is.

Customer Success, on the other hand, is tasked with keeping those misaligned customers satisfied, loyal, and cross-/upselling to them.

When a sales rep makes a promise that customer success can't keep, or strong-arms a client into a contract they don't understand, the stage is set for a clash of agendas that leaves everyone worse off.

The experience of the customer takes a backseat to hitting arbitrary targets.

Company reputation gets impacted, departments go at each others throats and revenue gets lost, especially in recurring revenue businesses like SaaS (Software-as-a-Service).

In the end, it is the company that loses out.

Human Psychology as Driver

Take another example of misaligned incentives: the cobra bounty case in colonial India. The British government, alarmed by the high number of venomous cobra snakes, offered a reward for every dead cobra. Locals soon started breeding cobras just to then kill them for the bounty. In response, the program was stopped.

But then all the cobra breeders set their now-worthless snakes free, making the cobra problem even worse than it was before.

Good intentions do not ensure good outcomes. When the incentives are wrong, even the most well-intentioned, capable people will produce suboptimal results.

As the saying goes, "The system will always win".

Any incentive system is an invisible architecture that shapes the actions and behaviors of those impacted by it.

As a leader, this requires to think like someone designing a game. It needs understanding of what motivates each player, and how the rules of the game will make them behave.

Executives and shareholders seek financial returns and a lasting legacy. They want to boost profits, grow market share, and be remembered as visionary leaders.

Managers and team leaders link strategy and execution. They want career growth and team success. They need to show leadership and deliver results while developing their teams.

Individual contributors have diverse motivations. Some focus on salary to support their lifestyle. Others want challenging work, new skills, and a sense of accomplishment. Younger workers value purpose and company values.

You need to make it in each player's personal best interest to work towards the collective goal.

For some of the players, the most effective incentives involve intangible rewards, like recognition, development opportunities, or a sense of ownership and control, not only bonuses or promotions.

The job of a leader is to align those incentives so that the winning moves of each player align with the winning strategy of the company as a whole.

Relaunched Revenue Organisation

So, how do you design a good incentive system?

Let's return to our revenue organisation to make some adjustments.

Marketing gets a bonus for every lead that actually turned into a paying customer, and an annual bonus linked to the overall conversion rate and customer lifetime values of those leads.

This will lead to a strong motivation of finding people who are genuinely interested in the product and work closely with sales to figure out what kind of leads are most likely to buy, what makes a "good" lead, and to create targeted campaigns that attract only high-quality prospects.

Sales gets a substantial bonus based on how long a customer stays with the company and how satisfied they are, apart from the initial sale bonus. A bonus pool for sales and customer success can be tied to sales growth, customer retention, and cross-sell/upsell revenue.

Sales will naturally be more focused on acquiring high-quality customers who will drive long-term value for the business, and be motivated to work with customer service to make sure each customer is set up for long-term success.

Customer success will be incentivized to not just react to customer issues, but to proactively drive value, create upsell/cross-sell revenue, and increase net promoter scores.

Alignment is a natural byproduct of the incentive structure, and the real magic happens when this thinking extents to every corner of the organization.

Engineering will be rewarded not just for shipping features, but for the measurable actual impact those features have on user engagement, satisfaction and customer retention.

HR gets rewarded not just for filling roles quickly, but for the long-term performance and cultural fit of the hires they make. If their bonus is tied to employee engagement scores, retention rates, and numbers of internal promotions, it forces every HR decision to consider the long-term.

Finance's rewards are linked to cash flow management, risk mitigation, and the strategic allocation of resources. By tying their incentives to the overall financial health of the company, finance becomes a natural strategic partner, not just a number-crunching cost center.

With a few adjustments, the course of the ship can be corrected and steered away from the iceberg. It is important to keep in mind, that incentives are not just a matter of compensation, but a powerful tool for shaping behavior in an organization.

Considerations for Effective Incentive Design

Each company is in a different stage, and will require different incentives. There is no one-size-fits-it-all solution for all companies at all times.

So what are some key considerations when you design incentives specific to your company, to drive the behaviors you want, and avoid cobra farming?

1. Tie rewards to outcomes, not just outputs. Paying people for being busy (like number of calls made) will lead to a lot of wheel-spinning. Instead, pay for results that directly contribute to your strategic objectives (like revenue generated or customer satisfaction).
2. Balance individual and team incentives. If you only reward individual performance, it will create unproductive cutthroat competition. If you only reward team effort, you will have a lot of free-riding.
3. Consider time horizons. Short-term rewards are sometimes necessary to hit certain targets, but it will also encourage short-term thinking. Make sure your incentives promote long-term value creation. Will bonuses be paid out monthly, quarterly or annually? How are multi-year equity vesting schedules being used?
4. Alignment with strategic goals: Incentives should be tied to the company's overall strategy and objectives. If your goal is to increase market share, then your sales team's bonuses should be based on market share growth, not only revenue. If your goal is to improve customer satisfaction, then CS’ incentives should be linked to NPS scores or retention rates.
5. Anticipate and mitigate gaming. No system will be perfect from day one. Any incentive system can be gamed. Continuously monitor for unintended behaviors and be ready to adjust accordingly.
6. Fairness and transparency: Incentives need to be perceived as fair, both in terms of internal equity (am I being paid fairly relative to my peers?) and external competitiveness (could I earn more elsewhere?). The criteria and calculation formulas should be as transparent and objective as possible.
7. Keep it simple. Overly complex incentive schemes can be confusing and demotivating. Reward systems that are subjective (like based on managers’ opinon) breed distrust and politicking. Aim for simplicity, clarity, and quantitative metrics in your design.

The key is to approach incentive design not as a static blueprint, but as a living, breathing reflection of your company's values and goals.

What worked in the scrappy startup phase will be disastrous for a mature enterprise. What motivated your sales team during the seed stage may fall flat post-Series A.

Effective incentive design is not easy and it is not a set-and-forget exercise. It requires deep understanding, willingness to experiment, and constant adjustment.

The choice is between a company at war with itself or one winning together on every front.

Reflection Questions: Are your incentives currently driving the behaviors and outcomes you want to see? Are they pitting your people against each other or rallying them around a shared mission? Are they rewarding busywork or real value creation?

If you can't answer these questions with a resounding yes, it's time to go back to the drawing board.