Reward Effort, Not Just Winners, to Outsmart Luck

BrightStar Ventures used to reward its portfolio managers purely on annual returns. Each December, the star performers pocketed heavy bonuses, while those who’d hit bad market storms went unrewarded—even if they’d followed every prudent step. The firm faced high turnover and morale issues.

After a wave of surprise underperformances, the leadership flipped its incentive model. They identified core process steps—market research calls, risk-analysis meetings, and weekly peer reviews—and set clear targets for each. Bonuses now hinged 70% on process metrics, 30% on absolute returns.

In the next cycle, many managers who’d previously been unlucky but diligent saw recognition and stayed. Their measured, disciplined practices spread as a hallmark of firm culture. Over two years, overall fund volatility fell 15% and average returns ticked up, since consistent processes beat erratic luck.

This shift—countering outcome bias—ensured that effort, skill, and smart risk management got rewarded, not just headline outcomes. It changed the firm’s DNA, creating an environment where teams tested hypotheses, learned quickly, and balanced ambition with disciplined execution.

First, map out every step your team takes en route to results—planning calls, trial runs, check-ins. Next, pick two or three of those steps you can count and track each quarter. Then, reallocate your reward structure so most of the bonus depends on meeting these process targets, with the rest tied to final outcomes. Finally, review the data quarterly and adjust your metrics. This way, skill and diligence shine through, even when luck dips. Launch it at your next review cycle.