One of the most destructive forces in a growing company is the “Compensation-Planning Doom Loop.” This is when leaders are more focused on hitting bonus targets than driving long-term value. We found a way to avoid this at Amazon.
When annual bonus targets are hard-coded into Operating Plan (OP) goals, the planning process stops being about taking calculated risks that will benefit your customers and the company, and it starts being about maximizing personal compensation. The gravitational pull of every leader who wants to meet their compensation objectives will drag the process down. Instead of shooting for the moon, everyone has an incentive to shoot for the treetops.
Binary, hard-coded goals without a system for executive discretion do not account for:
-The strong execution of a calculated, risk or complex idea that simply didn’t work.
-External shifts in the macro environment or economy that provide headwinds or tailwinds.
-The quality of the team’s work and meaningful improvements to key metrics that come up just shy of a binary target.
-The massive guesswork and inaccuracy of annual operating goals.
The result is a culture of sandbagging. Leaders avoid the “big swings” that drive long-term value because the risk to their personal compensation is too high.
How we avoided this at Amazon:
We removed the “pollutants” from the planning process through three core mechanisms:
1. No Quarterly or Annual Bonuses: By removing short-term cash incentives tied to specific metrics, we eliminated the primary motivator for sandbagging. Compensation was focused on long-term equity, aligning interests with the company’s health over years, not quarters.
2. Totality of Performance: Performance reviews were not a binary grade based on hard-coded goal achievement. Managers were required to assess an individual’s work in its totality. This allowed us to factor in the degree of difficulty—recognizing that a team that fails at a massive, complex challenge often contributes more value than a team that easily clears a low bar.
3. Shared Risk-Taking: The planning process at Amazon is rigorous. Leaders must review detailed plans and align on every major initiative.
This last point is critical: The risk is shared. Because leadership has vetted and approved the plan, if an initiative is executed well but fails to deliver the desired impact, it is not a demerit for the team. We agreed on the bet together.
Innovation and risk are inseparable. If you want a culture that takes big swings, you must build a system where execution is rewarded and risk is shared—not one where the system is rigged to play it safe.
