I’ve always been a fan of great business books, and lately, I’ve been diving into Jim Collins’ BE 2.0 (Beyond Entrepreneurship). This book is packed with insights, many of which feel especially relevant to the challenges most companies face today. One principle that stood out for me was a key concept from his classic Good to Great: “First who, then what”—which means getting the right people on the bus before deciding where to drive it.

Collins emphasizes the importance of aligning your team with your company’s values and ensuring they’re in the right roles. It’s not just about talent; it’s about passion, long-term vision, and fit.

The Problem with Compensation Plans

One powerful lesson in BE 2.0 is that compensation plans alone do not guarantee performance. Collins highlights that some of the highest-paid CEOs aren’t necessarily leading the best companies. In fact, short-term financial incentives can sometimes lead to behavior that undermines long-term success, even if they boost short-term results.

I’ve seen this firsthand. I implemented an incentive program several years ago that failed because it created unhealthy competition. The plan prioritized individual success over team success, and the friction between employees started to affect the culture. It was clear that I hadn’t read the culture correctly. After tweaking the plan to encourage more teamwork, the results improved—not just for the company but for the employees themselves.

Individual vs. Team Incentives: Finding the Balance

What fascinated me about Collins’ perspective is the evidence he presents on individual versus team rewards. He argues that short-term rewards can backfire, and I’ve seen both sides. While I appreciate his viewpoint, I tend to favor a balanced approach, especially for smaller businesses. I often see a mix of individual and team-based incentives work best in SMBs, particularly with smaller teams where roles and contributions are more visible.

For example, I’m currently working with a client who’s facing this challenge. They have a “star performer” who isn’t delivering, while the rest of the team is stepping up to pick up the slack. The issue? Their compensation plan heavily favors individual performance, and it’s starting to erode the sense of fairness within the team. To solve this, we’re overhauling their comp plan to reflect not just individual contributions but also team efforts. However, before making any changes, we’re re-forecasting the entire business to ensure the new plan aligns with the company’s strategy and market conditions.

Back to Basics: Using KPIs to Guide Compensation

As part of this process, we’re going back to basics by focusing on key performance indicators (KPIs). For this client, we’re using an 80/20 profitability matrix to evaluate their customer base. By analyzing sales and gross margins, we can identify which customers contribute most to profitability and which ones may need to be let go.

For example, we’ve developed a 90-day strategy to either move low-value customers to higher-margin categories or phase them out. Don’t wing it—having a business plan with targets is essential. Many business owners rely on gut feel, and while that can work, it’s critical to back it up with solid data. That’s why we’re using a simple forecast model, which includes an income statement, balance sheet, and cash flow statement tied to customer-specific sales forecasts.

Guidelines for Building a Compensation Plan

If you’re considering developing or revamping a compensation plan, here are a few key points to keep in mind:

• Assess your culture: Is your team more collaborative or competitive? Do they value individual rewards or group success?
• Align with your values: Make sure your compensation plan reflects your company’s core values.
• Use accurate, timely data: Ensure you have reliable monthly financials to understand what revenue you have available for incentives.
• Test and adjust: Trial your incentive plans before committing. Gather feedback from key stakeholders and make tweaks based on performance.
• Keep it flexible: Never lock a compensation plan in stone. Business environments change, and your plans should evolve with them. If stability is needed, pay fair base salaries, but be transparent about potential changes to incentive plans.

There’s no perfect compensation plan, but a well-thought-out incentive structure can drive results, boost morale, and increase profitability. For SMBs, I often prefer short-term goals with regular rewards, such as quarterly incentives. This approach fosters urgency, accountability, and results without sacrificing long-term thinking.

If you’re developing or revamping your compensation plan and want to ensure it drives results while supporting your company culture, let’s talk. Contact me to discuss how we can create a plan that fits your business.