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Management by Objectives (MBO) Bonus – Definition, Tips, and Considerations

Jun 17, 2022
5 min read
What does MBO mean? In the context of compensation management, MBO stands for management by objectives (MBO). The practice enhances productivity and performance by aligning individual employees with company objectives.

What Is an MBO Bonus?

A Management By Objective (MBO) bonus is a performance-based reward system in which managers and employees collaborate to set goals. Targets are fully aligned with organizational objectives, and team members earn based on how effectively they complete the goals defined in their individual MBO program.

It's important to involve employees with the decision-making process, as participation with goal-setting drives motivation and commitment. Each employee's MBO plan should define their tasks and workflows, and be emphasized from day one. 

In this article, leaders can learn about how to use management based bonuses to drive performance and discover more benefits to adopting the approach.

4 MBO Best Practices: take a simple approach; align with overarching goals; use a clear and consistent communication; embrace automated technology.

Four MBO Bonus Tips and Best Practices

1. Take a Simple Approach

The purpose of the management by objectives approach is to clearly define and streamline each individual's key performance indicators (KPIs). Leaders pay MBO bonuses to directly reward and encourage the obtainment of company goals. This means focusing on outcomes, and ideally only using two elements for each goal: a verb and a noun.

For example:

  • Increase sales
  • Increase social media posts 
  • Reduce waiting time
  • Cut costs
  • Convert more website visitors

Junior employees would usually get three core goals, and senior employees might get five, which are reviewed and updated on a quarterly or annually basis. Leaders should use the SMART goals system to set and measure KPIs: 

  • Specific: Clearly defined 
  • Measurable: Easily to measure in a standardized fashion
  • Assignable: Assigned to specific people
  • Realistic: Employees must be able to reach targets, or they will quickly become demotivated
  • Time-bound: It's important to set timeframes  

It's paramount that SMART goals are aligned with the company's mission, vision and core values.

2. Align MBO Bonuses With Overarching Goals

There are two big steps leaders must take when adopting a management by objective reward system. Before any collaboration takes place, senior management should determine and clearly define organizational objectives. Aim to set three to five long-term goals for each department that solves the most pressing issues within your company and to make MBO’s matter. 

With company goals set, it's time to translate them into something meaningful and actionable for each job role. Break down overarching goals into smaller objectives, and create a minimum, ideal and maximum timeline for each. Then, collaborate with employees and let them contribute to the personal goals they tackle in order to meet the company objectives.

For example, you might have a goal for the marketing department to increase the company's social media presence. In a meeting with a junior marketer, you might ask them to define how they'll do this. They might pledge to attract an additional 10,000 followers, partner with five influencers and create an additional post each day.  

When an employee directly contributes to their daily workflow, engagement drives up. And engaged employees are more productive, fulfilled and less likely to contribute to attrition. 

3. Use Clear and Consistent Communication

Communication is the glue that binds an MBO plan together. Reinforce performance objectives during daily briefings, one-on-one meetings, in-office screens and any other opportunity to motivate the team. Ensure team leaders are checking up on employees' targets, and that senior managers are staying on top of whether supervisors are hitting their goals. 

When everyone is on track to receiving a bonus, it means the entire company is on track with meeting its objectives. Many leaders agree it's one of the most effective ways of aligning outcomes with organizational objectives. However, it only works if management by objective is maintained through constant, clear communication.  

4. Embrace Automated Technology

Unless you centralize and automate the bonus allocation process, your leaders will spend too much time writing emails and spreadsheets, and creating documents. A Management by objective program should be diverse and dynamic, and the best way to deploy one is by using MBO software

Management by objective bonus software acts as a central hub where you can easily set, measure and adjust your goals and bonuses. This provides uniformity across all departments and sales regions, streamlines operations and practically eliminates the risk of human error impacting remuneration.  

With digital transformation taking full hold of business, automation is no longer optional. To remain competitive in an economic landscape that's changing and evolving faster than ever, leaders can't miss opportunities to automate and centralize wherever possible. 

And when it comes to financial transactions and aligning team performance with company goals, accuracy and speed are paramount. MBO software lets you increase productivity and drive performance of the entire company for minimum investment and maximum ROI.   

Benefits of MBO Sales Bonuses

Participation and Engagement Lead To Fulfillment

By involving employees in the setting of their own targets with compensation plans, you increase participation and, in turn, engagement. With the industry becoming increasingly people-led and competitive, employee engagement can be the difference between a business surviving or failing.  

Engaged Employees Mean Reduced Attrition

The main reason engaged employees should be a priority for every company across every sector is turnover. All leaders know that attrition is one of the biggest costs a company faces, and retaining top-performing workers is vital for success.

MBO bonuses increase job satisfaction and engagement, meaning your best employees are less likely to quit. And considering the great resignation is impacting the economy on an astronomical scale, executives should act quickly to find ways to retain staff. 

Enhance Collaboration To Reach Organizational Goals

In the past, the idea of involving employees in company objectives might have seemed like unnecessary information that could hinder performance. In practice, the opposite is true. By instilling a sense of purpose into employees' daily workflows, you make their job more meaningful.

Meaning drives people, and the more significant, clearer defined and personal you can make individual targets, the more meaningful each employees' job can be. Ensuring employees understand corporate goals and collaborate with leaders is a great way to make them feel more valued and to be more valuable to your organization.  

Increase Motivation

One goal of managing by objective is to make individual KPIs as specific as possible. Clarity of duties and responsibilities is paramount for individual and business success, and direct rewards act as positive reinforcement for achieving desired outcomes. 

An MBO bonus acts as an extrinsic and intrinsic motivational tool that plays to people's differing preferences. Some will be more driven by financial gain, while others will see the purpose and meaning of hitting company goals as the key driver of success. 

Understanding the Purpose of Management by Objectives 

The underlying principle of providing an MBO bonus is to increase autonomy and self-motivation among employees. Whether an individual is more money- or purpose-driven, MBO software helps streamline employee targets with organizational goals, leading to all the favorable outcomes mentioned above.

Want to learn more about setting objectives and goals? Check out our recent guide, “The Complete Sales Planning Handbook” to help your organization prepare for 2023.

  • Incentive Compensation
  • Sales Coaching and Motivation
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Xactly News Team

The Xactly News Team reports on the latest product, events and market trends taking place within Xactly and throughout the revenue intelligence industry.