No matter how clear your leadership principles and yearly plan may be, they speak softly in comparison to financial incentives. Money talks — if your leadership principles, your yearly plan, and your financial incentives are not closely aligned, you won’t get the right results.
At Amazon, there’s a belief that the “performance” in performance-based compensation must refer to the company’s overall performance — that is, the best interests of shareholders, which in turn are perfectly aligned with the best interests of customers. Accordingly, the compensation of all senior leaders is heavily weighted toward equity earned over a period of several years. The maximum salary itself is set well below that of industry peers in the United States.
When we were there, the maximum base salary for any employee was $160,000 (indications are that this remains true). Some new executive hires may receive a signing bonus, but the bulk of their compensation — and the potentially enormous upside — is the long-term value of the company.
Beware of Poor Comp Practices
Meanwhile, the wrong kind of compensation practice can cause misalignment in two ways: (1) by rewarding short-term goals at the expense of long-term value creation, and (2) by rewarding the achievement of localized departmental milestones whether or not they benefit the company as a whole. Both can powerfully drive behaviors that are antithetical to the company’s ultimate goals.
In other industries, such as media and financial services, a large percentage of executive compensation is doled out in annual performance bonuses. These short-term goals (and yes, a year is definitely short-term) can generate behaviors that are detrimental to creating long-term value.
In seeking short-term targets to maximize compensation, some may intentionally push revenue from one time period to the next, cannibalizing future results and obscuring current challenges. Others might overspend marketing funds to boost sales for the current quarter and thus hit a short-term sales goal, even at the expense of future quarters or long-term sales.
Some might even be tempted to defer expenses, put off maintenance, or cut back on hiring to hit a quarterly cost-containment target — all with negative longer-term implications. And a few may even drag their feet if asked to take on an important new role in the company until their bonus is “in the bank,” delaying some important company initiative.
Long-term stock-based compensation incentives, by comparison, eliminate such selfish and costly decisions by making them nonsensical.
It’s also worth pointing out that many companies set entirely independent goals for key players at every level. All too often this gives rise to infighting, information-withholding, and hoarding of resources, as each leader is incentivized to undermine the other.
Looking Toward the Long-Term
Amazon’s compensation is, by contrast, simple and oriented toward the long-term. As one is promoted at Amazon, the ratio of cash to equity compensation becomes more and more skewed toward long-term equity. Amazon’s “Frugality” leadership principle makes the reason very plain: “There are no extra points for headcount, budget size, or expense.”
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One clear downside to this approach is that other companies with deep pockets can try to hire away your best employees with big cash offers. And it is true that some employees leave for a short-term jump in their cash compensation. But on the positive side, Amazon’s approach reinforces the kind of culture it seeks to develop. Sometimes it is OK to lose people who have a short-term focus while retaining those who are in it for the long-term.
Amazon uses a similar long-term equity structure to prevent potential conflicts of interest in its wholly-owned subsidiaries, including IMDb, Zappos, and Twitch. Executives in those companies are compensated in the same manner as other Amazon executives, primarily with a base salary and a heavy emphasis on Amazon equity, which encourages collaboration.
Prioritizing Principles at Your Org
Ultimately, there’s no magic number of principles and mechanisms that every company will need. The magic lives in the moments when the principles are put into practice. You’ll develop the number that’s right for you, provided that you focus on how these principles will give clarity to your company’s vision and drive the right behaviors to create meaningful value for your shareholders and stakeholders over the long term — even when the CEO is not in the room.
It’s important, too, to allow your principles to evolve when necessary — to revise, cut, and add as the company grows and changes. “Learn and Be Curious” was the most recent leadership principle added at Amazon. “Being Vocally Self-Critical” was dropped, with much of its content merged into “Earn Trust.” Adding, subtracting, and modifying your principles in response to change or deeper understanding is a sign that you’re probably doing things right.
Strong leadership principles represent a company’s vision and enable good and fast decisions throughout the company. Codifying those principles is a huge step forward, but there is another step that is equally important: embedding them into every one of your company’s core processes, including hiring, performance management, planning, operating cadence, and career development.
From Working Backwards: Insights, Stories, and Secrets from Inside Amazon by Colin Bryar and Bill Carr. © 2021 by the authors and reprinted by permission of St. Martin’s Publishing Group.