Your Incentive Plan Is Your Real Strategy: 5 Rules for Paying People So They Behave Like Owners

In 2016, Wells Fargo paid a $185 million penalty and dismissed roughly 5,300 employees. The bank had not been hacked, and no executive had run off with the money. It had simply set a sales target: eight products per household, promoted internally with the slogan "Eight is Great," and tied branch pay and job security to hitting it. Employees hit it. A later review identified as many as 3.5 million accounts and credit cards that customers had never asked for.

Nobody at Wells Fargo wrote a policy telling staff to open fake accounts. The compensation plan said it for them. That is the uncomfortable truth about incentives: whatever you decide to pay for is the strategy your company will actually execute, no matter what the strategy deck says.

I have made a smaller version of that mistake myself. Years ago, in one of our commercial teams, we paid on volume shipped. We got volume, in exactly the form we asked for: heavy discounts to move cases at the end of the quarter, a distributor warehouse full of stock that had not sold through, and a margin line that quietly deteriorated while the sales chart looked magnificent. The team did nothing wrong. They did precisely what we paid them to do.

Goodhart's law is the most expensive law in business

The economist Charles Goodhart observed in 1975 what has since been condensed into a single sentence: when a measure becomes a target, it ceases to be a good measure. The moment a number decides someone's income, that person stops trying to describe reality with it and starts trying to move it.

This is not cynicism about people. It is arithmetic about attention. A manager with eleven priorities and one bonus metric has, functionally, one priority. Everything unmeasured becomes optional, and everything measured becomes negotiable at the edges.

So the real question for any owner is not "how do we motivate people?" It is narrower and much harder: which single set of behaviors, repeated a thousand times without supervision, would make this business great, and does our pay plan reward exactly those?

Four ways incentive plans quietly go wrong

1. You pay for revenue and get revenue at any price

The most common flaw in commercial compensation is paying commission on the top line. Revenue is not what feeds a company; gross margin is. Pay on revenue and you have handed your sales team a legitimate reason to discount, because a smaller price with a bigger volume still pays them more, even when it pays you less. Every point of discount your salesperson grants comes almost entirely out of your profit, and almost not at all out of theirs.

2. You pay for what is easy to measure and lose what is not

Call center bonuses tied to average handle time produce short calls, not solved problems. Delivery bonuses tied to on-time percentage produce drivers who mark packages delivered from the curb. The measurable part of the job gets optimized and the unmeasurable part, the part customers actually remember, gets sacrificed to it. If a metric can be satisfied without the outcome it was meant to represent, someone will eventually satisfy it that way.

3. You pay individuals in a business that is a team sport

Individual incentives work when a person genuinely controls the outcome. In most modern companies they do not. When a sales rep's bonus depends on their own account list, the rep has a financial reason not to share a lead, not to help onboard a colleague, and not to flag a problem that would slow a booking. You are paying for internal competition and then holding meetings about the lack of collaboration.

4. You pay for this year in a business that takes ten

We plant vineyards that will not produce a serious wine for years, and develop buildings that take longer than that from land to keys. An annual bonus in that context is asking a manager to optimize a twelve-month window inside a decade-long game. The predictable result is deferred maintenance, thin training budgets, and a beautiful current-year P&L that has borrowed from the next three.

Five rules I use for designing pay that actually aligns

Rule 1: Pay on margin, not on revenue

Switch commission from the top line to gross margin and two things happen within a quarter. Discounting drops, because the discount now hits the person granting it. And your team starts steering customers toward the products that make you money, which are usually the products you most want in the market anyway. If margin data is too sensitive to share, pay on a margin index instead, but pay on profitability in some form.

Rule 2: Pay when the cash lands, not when the order is signed

A sale that is never collected is not a sale, it is a loan you did not approve. Tie a meaningful part of the payout to cash received, and receivables become everyone's problem instead of the finance department's problem. The cheapest collections team you will ever hire is a commission plan that pays on cash.

Rule 3: Put a company gate in front of the individual number

Structure the bonus so that individual performance only pays out if the business hits a threshold as well, on profit, on quality, or on both. This one change converts a plan from "maximize my number" to "maximize my number in a way that does not damage the whole." It is also honest: in a bad year for the company, a full bonus for a great year in one department is a transfer from the balance sheet to a department.

Rule 4: Never cut the plan because someone won

The fastest way to destroy the credibility of every future incentive is to move the goalposts after a manager earns more than you expected. If the number was too generous, you learned something about your model, and you fix it in the next cycle with the change announced in advance. Pay the current one in full. An incentive plan is a promise, and a promise you edit after the fact is not an incentive, it is a lottery.

Rule 5: For the long horizon, give people ownership economics

Annual bonuses buy annual effort. If you need someone to think in five- and ten-year arcs, they need a claim on what the business is worth in five and ten years. That does not have to mean real equity. Phantom shares, a share of the increase in enterprise value, or a deferred profit pool vesting over several years all create the same time preference without complicating your cap table.

What the evidence says about giving people a stake

This is not just intuition. Research compiled by the National Center for Employee Ownership finds that ESOP-owned firms typically see a productivity gain of around 5% in the first year a plan is adopted, and NCEO's analysis of federal survey data reports that employee-owners had roughly 33% higher median income and substantially higher household wealth than comparable workers without ownership.

The industrial examples are older and even more instructive. Nucor built the most efficient steel operation in the United States on a pay system where production crews earn bonuses tied directly to tons of quality steel shipped, with a base wage below the industry norm and total pay frequently well above it. Lincoln Electric has run a piecework-plus-profit-sharing system for the better part of a century in Cleveland, and has kept manufacturing there while competitors moved offshore. In both cases the lesson is the same: the company did not motivate people with slogans, it changed who benefits when the work gets better.

How we think about it across eight verticals

Manzanos Enterprises operates across wine, real estate, hospitality, water, electrical installations and mobility, with more than 180 people and business in over 75 countries. One universal pay plan across that range would be a mistake, because the economics of a hotel are not the economics of an electrical contractor or a wine distributor.

What we do keep universal is the design test, and it is a short one. Before we approve any incentive scheme, we ask three questions: What is the worst thing a smart, self-interested person could do to maximize this payout? Would that behavior be good for the customer? Would it still look good in three years? If the honest answer to the first question makes you uncomfortable, the plan is already broken, and no amount of culture talk will fix it.

Getting this right is also inseparable from measuring the right things in the first place, which we covered in the KPIs every CEO should track. And it is one of the strongest levers on retention, because most people do not leave over pay level alone but over the feeling that the game is rigged, a theme we explored in why your best people quit.

Key Takeaways

• Your compensation plan is your real strategy. Whatever you pay for is what your company will actually do, regardless of what the strategy document says.
• Goodhart's law is unavoidable. When a measure becomes a target, people optimize the measure rather than the outcome it was meant to represent.
• Pay on margin and on cash collected, not on revenue booked. Revenue-based commissions finance your competitors' discounting habits with your own profit.
• Gate individual bonuses behind company results so nobody can win personally while the business loses.
• Never cut a plan mid-cycle because someone earned too much. Fix the model in the next cycle and pay this one in full, or lose credibility permanently.
• Long horizons need ownership economics. Phantom equity, value-share or deferred profit pools buy long-term thinking that an annual bonus never will.
• Stress-test every plan with one question: what is the worst thing a smart, self-interested person could do to maximize this payout?

Frequently Asked Questions

What can happen when incentives are poorly designed?

Poorly designed incentives produce exactly the behavior they reward, including behavior nobody intended. Wells Fargo's sales targets led to millions of unauthorized accounts and a $185 million penalty in 2016. Less dramatic versions appear everywhere: margin erosion from volume-based commissions, uncollected receivables, and internal competition that blocks collaboration.

What are the unintended consequences of incentives?

The most common are gaming the metric instead of achieving the goal, short-term optimization at the expense of long-term value, and the erosion of intrinsic motivation for work people previously did well without being paid extra. A single measured target also crowds out unmeasured responsibilities, so quality, service and mentoring quietly degrade while the bonus metric improves.

How do incentives affect behavior?

Incentives direct attention more than they create effort. People generally work hard regardless; what a bonus decides is which of their competing tasks gets the hard work. That is why the design question is never "how much should we pay?" but "which specific behavior are we buying, and what does it displace?"

How do you align incentives between employees and owners?

Pay on the metrics owners actually care about: gross margin, cash collected and profit, rather than activity or revenue. Add a company-level gate so individual payouts depend partly on group results, and for senior roles include a long-horizon instrument such as phantom equity, a share of enterprise-value growth, or a deferred profit pool that vests over several years.

What are the four types of incentives?

Compensation frameworks typically distinguish financial incentives (bonuses, commissions, profit sharing), ownership incentives (equity, phantom shares, ESOPs), recognition incentives (advancement, status, public credit) and non-monetary or intrinsic incentives (autonomy, mastery, purposeful work). Effective plans combine them, because a purely financial plan tends to be the easiest one to game.

Audit your incentive plan this quarter

Take your current bonus or commission plan and run the single test above: write down the worst thing a smart, self-interested person could legitimately do to maximize their payout. If that list makes you wince, you already know what to change, and you now know what your team has been quietly optimizing. Explore how the Manzanos Enterprises group builds durable businesses across eight verticals and five generations, or see the businesses we operate if a conversation would help.