23. Short-Term Incentives

Tie the Bonus to What the Leader Controls

It is December. The owner is in the year-end conversation cycle. Three leaders, three different stories. “My pipeline carried us, I deserve more than the budget.” “Margins held but Q4 had problems that were not my fault.” “I delivered every report on time but the company missed EBITDA so my variable came in light.” The owner runs math in their head and produces three numbers that approximately make sense. The CRO leaves feeling underpaid. The COO leaves feeling lucky. The CFO leaves wondering whether the system is fair.

That is what year-end variable compensation looks like without a documented plan. Every leader is told what their bonus is at the moment they receive it. They were never told what they were aiming for. Subjective scoring fills the vacuum that objective math should have filled.

Milestone 23 ends that. Each functional leader gets a documented Short-Term Incentive plan tied to KPIs they directly control. The math reconciles to the Annual Budget. The bonus pool from M22 funds the payouts. The leaders see the plan in January, not the answer in December.

What This Milestone Installs

Each functional leader has a documented annual incentive plan with KPIs that trace to the financial model. Specifically:

• STI plan per seat — CRO, COO, CFO each have a documented annual plan with targets, weighting, payout curve, and trigger conditions
• KPIs tied to outcomes the leader controls — CRO bonus on revenue + CAC + retention. COO bonus on gross margin + operational KPIs. CFO bonus on cash flow + financial signal accuracy + budget discipline. No vanity metrics.
• Reconciliation back to the Annual Budget — every leader’s bonus math traces back to budget revenue, margin, and cash flow targets. Visible math.
• Funded by the M22 bonus pool — payouts come from the financially constrained pool. When the business has a great year, the pool funds upside fully. When it has a soft year, the pool funds at a fraction and leaders feel it together.
• Quarterly visibility committed — STI accrual trajectory reviewed quarterly so leaders see where they stand against the year, not just at year-end

The owner stops doing December “what feels right” math. Each leader’s payout becomes a function of objective performance the leader can see month-by-month.

The Core Idea: Pay the Outcome the Leader Controls

The defining principle. Each leader gets paid on the metric their seat is accountable for, not on company-wide outcomes they cannot directly influence and not on activity counts that look like work but do not produce value.

Most STI plans get this wrong. The typical mistake: tying the CRO’s bonus to “company EBITDA.” The CRO can grow revenue. They can hit CAC targets. They cannot directly control overhead or financial close. Tying their bonus to EBITDA punishes them for outcomes the COO and CFO own. Worse, it gives them an excuse for revenue misses (“the COO’s margins were tight”) and rewards them for someone else’s wins.

Another typical mistake: tying any bonus to activity counts. Tickets closed, pipeline meetings, reports filed. These tell you the team is busy. They do not tell you whether the function produced margin.

The reframe. Look at the income statement. The CRO seat owns the revenue line plus the CAC and retention metrics that feed it. The COO seat owns gross margin per line plus the operational KPIs from M17. The CFO seat owns budget-to-actual variance plus cash position plus financial signal accuracy. Each seat has a small number of metrics that map directly to outcomes they control. Those become the STI scorecard.

Three to five KPIs per seat. Each one with a target, a payout curve, and a documented connection to the Annual Budget. The math is visible. The leader builds the year around it. There is no December surprise. The owner who has built objective STI plans is no longer the year-end decision-maker. The plan made the decision before the year started.

The Reconciliation Discipline

Every leader’s bonus math has to trace back to the Annual Budget. No exceptions.

The CRO’s revenue target is the budget revenue line. The COO’s gross margin target is the budget gross margin percentage. The CFO’s cash position target is the budget cash trajectory. Beat budget on the line you own, beat your STI target. Miss budget, miss your STI target. The conversation about whether the leader delivered becomes a conversation about whether the budget was hit.

Three things become true when the discipline holds. STI math is objective (no subjective scoring). STI math is defensible (the leader sees the formula in January). STI math is funded (the M22 pool caps the upside and floors the downside automatically). Nobody walks blindsided because the funding mechanism was visible from day one.

This is the discipline that turns the year-end conversation cycle into a system. The math came from the plan they signed in January, not the owner’s judgment in December.

What the 5-Year Picture Actually Looks Like

The Module 8 build continues. M22 set the philosophy and locked the bonus pool. M23 designs the per-seat STI plans that the pool funds.

Year 5, Q2 (M23 install). The owner sits down with each functional leader and the CFO to draft the STI plans. CRO weighted on revenue + CAC + retention. COO weighted on blended gross margin + operational KPIs + GP per Employee. CFO weighted on budget-to-actual + cash position + financial signal accuracy. Targets at roughly 25% of base for STI target. Pool draws from the M22 formula.

Year 5, Q3-Q4. First quarterly review at the Quarterly Boardroom. STI accrual trajectory pulled per leader. Year-end runs through the math. Pool funds at the EBITDA performance level. Each leader’s payout computed from the plan. Conversations last 20 minutes per leader. No December negotiations.

Year 6+. Plans rebuilt at the Annual Owner’s Reset against the new Annual Budget. Targets adjusted. Weighting refined based on what surfaced last year. The system iterates.

The compounding mechanism is objectivity. Every year the math runs without negotiation is a year the leaders trust the system more.

How You Build It

A 5-step path. Roughly 15 to 25 hours spread across two to three weeks. Done by the owner with input from the CFO and ideally a comp advisor.

1. Identify the KPIs each seat directly controls. Pull from the relevant Build phase Module (Module 5, Module 6, Module 4). Three to five per seat. If the KPI is not in the Build phase Module, it is probably not the right KPI.

2. Set targets and payout curves. Targets come from the Annual Budget. Payout curves typically run threshold → target → cap (e.g., 50% payout at threshold, 100% at target, 150% at cap). Weight the KPIs so the most consequential outcome carries the heaviest weight.

3. Reconcile total STI targets against the bonus pool. Sum the targets across all three seats. Compare to the pool’s expected funding at budget EBITDA. The pool must cover the targets at full performance. If not, raise the pool formula or lower the STI targets.

4. Document the plans per seat. Each plan: KPIs + weighting + targets + payout curve + threshold + cap + funding source. Two pages per seat. Signed by owner and leader.

5. Communicate transparently and lock the quarterly cadence. Each leader sees their plan in January. Each leader reviews their STI accrual at the Quarterly Boardroom. Year-end becomes math, not negotiation.

Tools Used

Tool	What It Does
Annual Bonus Plan Template	Per seat. Two pages. KPIs + weighting + targets + payout curve + threshold + cap + funding source.
KPI Mapping Worksheet	Maps each leader’s STI KPIs to specific lines in the Annual Budget. Proves the plan reconciles.
Variable Comp Calculator	Computes STI payout given KPI achievement. Used quarterly to show accrual trajectory.
STI Communication Template	The conversation script for explaining each plan to each leader in January.
Quarterly Accrual Tracker	Shows STI trajectory per leader against target. Reviewed at every Quarterly Boardroom.

Connected Concepts

• Short-Term Incentives — The annual layer of the comp system
• Annual Bonus — Paid from the M22 pool against documented KPIs
• Bonus Pool — The funding mechanism from M22
• Variable Compensation — Pay tied to performance versus pay tied to time
• Performance Triggers — Threshold, target, cap structure of the payout curve
• Annual Budget — The targets every STI plan reconciles against
• Capital Allocator — The lens that makes STI an investment in alignment

Scoring: 1 → 2 → 3

1 (Learning). You have consumed the M23 podcast and understand the principle that STI must tie to outcomes the leader controls and reconcile to the Annual Budget. No STI plans yet built.

2 (In Progress). STI framework drafted. Plan built for at least one seat. KPIs identified per seat but not yet fully reconciled to Annual Budget targets. Quarterly visibility cadence not yet committed.

3 (Installed). STI plans built for all three seats. KPIs per plan reconcile back to the Annual Budget. Bonus pool from M22 funds STI payouts. Quarterly STI accrual visibility surfaces in the Quarterly Boardroom. Annual recalibration cadence committed. Each leader has signed their plan.

The verification test. Walk through one leader’s STI plan in 90 seconds. “CRO seat. Three KPIs. Revenue weighted 60%, target $X, threshold and cap defined. CAC weighted 25%. NRR weighted 15%. Total STI target $X. Funded from the M22 pool when EBITDA hits the budget threshold.” If you can deliver that with the math, you are at 3.

How It Lives in the Ownership Cadence

Short-term incentives live on a quarterly visibility rhythm with annual recalibration.

Monthly. STI accrual modeled in the Monthly Ownership Meeting™ Financial Signal Review. Visibility, not decisions.

Quarterly. STI accrual trajectory reviewed in the Quarterly Boardroom Rhythm™ alongside KPI scorecards. No mid-year plan changes unless a Tier 3+ event triggers it.

Annually. STI plans rebuilt at the Annual Owner’s Reset. Targets reset against the new Annual Budget. Weightings adjusted based on lessons from the prior year. Plans signed for the new year.

Triggered events. Mid-year role change, leadership departure (pro-rated payout), material business event that invalidates a KPI. Each triggers a documented amendment, not a renegotiation.

What’s Next

Milestone 23 is the second of three in Module 8. With base comp anchored (M22) and short-term incentives tied to the year’s plan (M23), Milestone 24: Long-Term Incentives installs the multi-year alignment. Phantom equity, profit interest, ESOP exposure, deferred compensation. Instruments that tie each leader’s wealth to the business’s enterprise value over time.

M22 anchors the role. M23 rewards the year. M24 aligns the multi-year wealth.

← Back to Module 8: Executive Compensation · Milestone 22: Executive Base Compensation · → Milestone 24: Long-Term Incentives