When To Use An MBO Bonus Plan

Before we go into when to use an MBO bonus plan, lets define what an MBO is.  “MBO” stands for management by objective, it is a type of sales incentive that is tied to specific objectives, goals or milestones.  Some companies also refer to it as a KSO plan, or key sales objective plan.  Both mean the same – MBO & KSO, a sales compensation plan based on predefined objectives.

There are other types of sales incentives, the main difference between an MBO and other sales compensation incentives is the payment timing and type of goals or objectives.  An MBO is a bonus type payment, typically paid as a lump sum at the end of a period once a milestone is reached; whereas other plans typically payout more frequently and are directly linked to revenue generation.  Most commonly, MBO’s are paid quarterly.  There are other MBO’s that are paid twice a year or even annually. 

The timing of the MBO payments depends on the objective.  If the objective takes 3 months to complete, you cannot pay them earlier, so this would result in quarterly payments. This why MBO’s are most useful for sales with longer sales cycles.  The sort of goals the MBO’s emphasize are objectives tied to sales progression (e.g., executing contracts to move into the next stage in the sales process).  In addition, because of the incentive payment timing, where the salesperson receives cash-flow in wider intervals, the pay mix is typically less leveraged.  What this means is that typically with MBO bonus plans or payment types, the sales role will have a larger percentage of their target pay paid in base salary, and less in variable.

Now as for the objectives, the objectives that the company will be paying for should be related to sales milestones or progression, and they should be measurable.  This is a major area where companies sometimes bend the rules a bit.  Some companies may pay on non-sales driving items (like entering CRM data, training, etc.), with the MBO plan the objectives should be linked to progressing sales.  If the objectives are not revenue driving (whether direct or indirect), then perhaps the role should not be on a sales incentive plan and more so on a corporate bonus plan.  It all boils down to a role’s influence over sales.

When creating MBO plans, one of the key areas that companies should be extra careful in is goal setting and upside.  As an example, if your salesperson has 2 objectives to complete in order to earn their target variable, but the actual opportunity for that objective allows them to complete 10 – then your goal setting is off.  Quotas or goals should be challenging yet attainable.  Now let’s factor in upside, if you don’t cap your MBO’s and a salesperson can get accelerated payments then you will be overpaying as well.  This is why most companies either cap MBO’s or limit upside.  In addition, most objectives are not directly related to revenue driving (they are more sales progression, or indirect influence).  For this reason, most companies choose to cap MBO's at 100%, on the conservative side, or cap it at 120% to give the salesperson some potential upside.  When a salesperson has direct influence on revenue, i.e., they can drive sales directly, having significant influence on a customer’s buying decision, then plans are typically uncapped.

The overall goal of the MBO plan or Bonus plan is to drive sales progression or results, so the objectives should be linked to sales progression and be clearly defined to the salesperson.  In this manner, the goals, or objectives, of the MBO plan align with sales results.  The MBO planning process, should start with company goals as in other sales compensation plans, but the objectives are more unique to the person in the role.  MBO’s allow for more flexibility in plan design, but with this flexibility comes responsibility – quantifiable goals and upside should be well documented beforehand and agreed upon.  The final step in the MBO process is confirmation of the completion of said objectives – before payment.  If it all possible verified in the CRM, or if not possible at least by the direct manager.  For more information on designing MBO plans or creating effective sales compensation plans check out our course here.