We’re back with Part 2 on bonuses. I split this piece into two parts because it got too long and too important for one newsletter. (Part 1 here if you missed it.)

TLDR from last week: bonuses live on a spectrum (no bonus, simple, complex).

The complex bonuses, where things like contribution margin and EBITDA live, cost you two things nobody prices in: management and data.

I recommend thinking about whether a simple bonus or a generous salary with employee perks would suffice instead of immediately reaching for a bonus tied to contribution margin.

But sometimes a role genuinely needs a more complex bonus.

A client of mine did — they were hiring a lifecycle marketing manager. If that's your situation, here are the mistakes to avoid and the best practices to put in place.

What does the employee actually control?

A retention hire owns the flows, the testing, and lifecycle campaigns, but she doesn't set your prices, and she can't run a 50% promo just because it beat the 30% one.

Tie her whole bonus to contribution margin and you've pinned her pay to levers she can't pull.

When the number misses for reasons that have nothing to do with her work, she feels cheated…and she's not wrong.

Say you put your Amazon manager on Amazon's contribution margin alone.

Feels clean because it's their channel, their numbers.

But costs and customers don't respect channel lines: the ad you ran on Meta drives sales on Amazon and your website both, so whose margin does it count against?

Every shared cost turns into a negotiation, and your employee starts auditing reports line by line because their paycheck rides on the answer. You've also told them to grow one slice, so that's what they'll do, even when it's not what's best for the business.

If you hired someone to grow the whole thing, don't pay them to grow a corner of it.

A bonus tied to contribution margin is a promise to share the data, whether you meant it that way or not.

Put yourself in the hire's seat: you'd want to know where you stand every month, not find out at the payout meeting in January. Skip the check-ins and the employee spends all year building a number in their head and it's always rosier than reality.

When the real figure lands lower, it feels like a bait and switch, even though nobody did anything wrong. The more complicated the bonus, the more often you have to talk about it.

A new person in a role you've never had, starting halfway through the year, is not going to meaningfully move revenue as they barely know your customer yet.

Bonus them on targets anyway and you get one of two bad outcomes: they negotiate the numbers down to something safe, or they go crazy chasing the big number with a dozen untested experiments that break what was already working.

Neither is what you want in month one. Let them learn the business, then set real targets once you have a baseline.

Three things can take a bonus from "won't blow up" to "actually works."

I'm not saying hand them a blank check. They're an employee, not a co-owner and most people don't actually want to design their own pay. But give them a voice.

"Here are the metrics I think matter. If we picked two, which would you choose? Should the target be $1.20 or $1.50?"

Now they're bought in.

And when the number gets hard later, they can't tell you the targets were unfair because they had a hand in picking them.

If the hire can't tell a friend how their bonus works, they can't work toward it. And if you can't explain it simply either, that's your signal it's too complex to run.

How much rigor depends on the dollars.

$500 vs $1,000, not a big deal.
$10k vs $50k, write it down and have them sign it.

At minimum, make sure you record the meeting where you discuss it.

Conversations aren't enough as memories get fuzzy by payout time. Document the metric, what's in and out, the report that's the source of truth, and when it pays.

Back to my client hiring the lifecycle manager. The CEO wanted to bonus based on contribution margin by channel and I pushed back.

First I made the CEO say out loud what the role actually is. Not "the email and SMS person." The client realized the role was about building retention and retention isn't a channel, it's wherever the customer actually wants to hear from you.

If the CEO bonused her on "growing the email list", then that's exactly what she would get: more sends, more links, more discounting. Show me the incentive, I'll show you the outcome.

So we built the bonus around outcomes she owns, measured for the whole business, not one slice:

Two rules made it more human.

The full three-pillar structure kicks in next year, once there are 6 months of real data to set targets against.

The structure doesn't have to be perfect from day one. It can change — especially when you're figuring out how to measure a role you've never had before. That is genuinely hard and that's fine.

Like you do with testing ad creative, pick the best starting point you can and adjust as you gather more information.

To me, comp is a finance problem, not an HR one.

And to solve that problem, it's important you can answer these questions before you commit to any bonus:

If you can't answer all five, you're not ready to put a number in the offer letter.

Get it right and the bonus pays for itself. Get it wrong and it becomes a problem you didn't know you were paying for.

— Sam

P.S. I created a simple template you can use to document your bonus. You can download it here for free.

Talk to me

My inbox is open and I love hearing from you - respond to this email with your questions, feedback, things I screwed up, or just because.

Looking for more? Some of our most popular posts:

Did someone forward this to you? If you like it, you can subscribe here