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Chenmark Series 2: Ethos and Incentives - Ep.164
Think Like an Owner
**Incentives for Middle Management and Entry Level Employees **
The best approach for incentivizing free cash flow generation in an operating company is to focus on determining the size of the incentive compensation pool rather than assigning direct percentages to individuals. Responsibility for aspects like capital allocation, financing decisions, and working capital management is usually limited to higher levels in the organization such as the CEO or senior leadership team. Incentives for the senior leadership team and middle management should be aligned with longer-term goals and free cash flow generation, while operational metrics can be used for driving specific outcomes in lower levels of the organization. A cash flow-based compensation plan should be balanced to avoid hindering reinvestment projects and capital allocation decisions towards areas with potential returns.
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