tl;dr This article illustrates why it is not possible to assign a dollar value to a PM’s contribution in a fair and consistent manner.
“How much should I pay my Product managers?” – A founder asked me.
He continued – “I have standardized the pay structure for my sales team based on outcomes. I pay them x% of the revenues they bring in. It is so simple and transparent. Can I formulate something similar for the product organization?”
This got me thinking and I started breaking this problem down starting with different PM roles, their value creation and the revenue/cost savings measurement in dollar terms
Value Creation in different PM roles
1. Growth / Optimization PM – PMs in these roles have goals that are either dollar terms (e.g. revenue/cost impact) or metrics that can be easily translated to dollar terms (e.g. Higher conversion or engagement leading to additional revenue).
However, there is a problem – The scale of the company influences this dollar impact more than the effort/skill of the PMs.
For example, a 2% improvement in the user conversion funnel in a startup could be a very minuscule gain in dollar terms. On the other hand, the same 2% translated to roughly 60 million USD impact when I was working at PayPal. The size of the cross-functional team that created this huge impact was just 7 thereby resulting impact of 8.5 million per team member!
Thus even if the outcomes are measurable in dollar terms, scale impacts value creation very significantly and it would be inappropriate to use only the dollar impact to pay the product managers.
2. Scaler PM – Product Managers in this role build stuff to scale a particular product/business.
For example, PMs would build systems or automation to support 10x traffic or to reduce the escalation of manual work in the future. Here too, the current scale determines the size of the immediate outcomes. The full potential of these features is generally realized a few months or even years later when the product has grown 10 or 100x.
The work of the PMs here, therefore, is only an investment for the future and with few exceptions (e.g. addressing adjacent markets/use cases) has very little immediately measurable dollar impact.
3. Experimenter PM – This is a PM building an MVP in a very early-stage startup (or a fully new initiative in a scaled-up company). For the first few months or even years, the revenues could be virtually minuscule (or even zero). In many cases, the experiment could just fail for reasons not in control of the PM building it. As an example, a PM in a pre-PMF stage startup/product would always have a negative ROI however talented or hardworking he/she is. So PMs’ immediate dollar contribution is zero or very small for the experimenter PMs as well.
4. Platform PM – PM builds platforms that can be used by different businesses/stakeholders in the company. Depending on how short or long-term the platform vision is, the impact and the timeline in dollar terms are going to be very different.
Synthesis & Summary:
We can clearly see from the above that there is so much uncertainty and variance in both value creation & value realization timelines.
However, a company needs PMs to help with scaling initiatives, experimenting/innovating and formulating a broad platform vision during its different stages of existence irrespective of whether the value of a PM’s work is realized immediately or not.
With this, we can safely argue that there is no way to consistently link PMs’ dollar contributions to their actual compensation.
So, founders/executives would have to go by the market-determined pay rather than designing the compensation around intrinsic and immediate value created by product teams.
In the next set of articles, we would cover –
- How does pay discovery happen when every company is trying to use standards adopted by other companies? Can there be a true neutral benchmark?
- In the absence of a dollar measurement, how do we measure PM performance in the above-mentioned roles?
- Is there a connection between the measurement of PMs’ contribution and imposter syndrome?
