The MBO Bonus – Definition, Tips, and Considerations

Dec 31, 2018
6 min read
An MBO bonus is a performance-based reward an employee earns when completing the goals laid out in their MBO program. Learn how you can use it effectively.

Definition of MBO Bonus

An MBO bonus is a performance-based reward an employee earns when completing the goals stated in their MBO program. These bonuses and objectives are set as a result of discussions held between management and employees, and should stem directly from higher-level organizational targets.

Because they are a product of collaboration, and based on each employee’s individual tasks, MBO bonuses are visible from the day they are set, and thus highly motivating. Employees should be well aware of what exactly needs to be achieved in order for their bonuses to be received.

How to Make the Most of MBO Bonuses

Take a Simple Approach

One of the most valuable aspects of the MBO bonus lies in its transparency. With both the bonus amount and required task in plain view (thanks to the role the employee plays in goal setting), employees can’t help but visualize attainment. A down payment on a car, or perhaps an engagement ring? A nice chunk to put towards paying off a credit card? With employees themselves contributing to the process, they know exactly what’s expected of their performance.

They can then visualize themselves achieving set goals and receiving the attached bonuses in return. Given all of that, you don’t need to go overboard with objectives and related MBO bonuses. Meaning, setting around three major goals per quarter is an optimal amount.

The saying “when you try and do everything, you do nothing” definitely rings true in this case. We’ve all been in the position of having too much to do; so much that you just spin your wheels trying to figure out where to start. Or worse, starting, and then jumping to the next task before completion of the first, and then on to the next one, over and again (rabbit holes will get you every time if you let them). Not to mention the overwhelming feeling of having to hit something like seven goals for full payout versus an achievable three. 

To cement the point, companies that set goals quarterly in the form of MBOs see 31 percent greater returns from their performance process than those who set goals yearly. So keeping things simple with a few targets per quarter is the way to go.

Align Corporate Goals to Individual Objectives

While it’s important for MBO bonuses to be tied to individual tasks, it’s also crucial that employees are receiving rewards for achievements that are aligned with corporate objectives, too.

Think of it like a system of individual funnels (employee goals) constructed to fill a big bucket at the bottom (your organizational goals). There is no way that main bucket gets filled if the personal employee funnels above it are pooled or misaligned. Sure you might be successful at filling individual funnels, but you’ll eventually have water all over the place, and very little in the bucket.

Improving employee morale is an additional benefit of ensuring goal alignment. CEB HR Leadership Council found that organizations that effectively convey to employees how their individual role impacts the overall business, experience a 21% higher total shareholder return over three years. One can speculate that this is because such communication gives employees purpose and an identity as a team member tasked with shouldering their share of the load. This greatly improves the odds of your people being engaged and happy in the workplace, in return.

Practice Clear and Continuous Communication

When it comes to goal setting, you hear this a lot—it should never be a “set it and forget it” activity. If you are going through the process of setting goals with your people, you need to also take the required steps of checking in on those targets before the deadlines. Reinforcements and reminders keep employee minds fresh and focused on the task at hand, and nudges them back on track of achieving their MBO bonuses.

As an example, remember when your parents would ask if your room was clean?  Over time (certainly not immediately), you began to get the sense of when they were going to ask such an important question, so, you made sure your room clean before they could. Then, when they did, you took the pleasure in stating a resounding “Yes!” Eventually, your room was clean more often than not, all because you were having regular check-ins with your parents about it—and, you were expecting those check-ins, and began to take a little pride in your responsibility.

See where I’m going? If employees know they aren’t going to have to talk about a goal and their progress, they’re going to procrastinate. It’s just human nature. On the flip side, they aren’t going to want to look foolish by having zero progress to report when asked, and the goals they’re reporting on will naturally float to the top of their minds on a more regular basis.

Embrace Technology

To be clear, we aren’t talking about spreadsheets or word processing documents. Yes, they are on a computer, but no they aren’t the best technology for such a situation (or many situations involving compensation, incentives, or rewards).

Employee Performance Management or MBO software like Xactly Objectives™ allows for flexibility and organization, and the visibility I’ve been talking about. All of this creates the ability to easily adjust goals and bonuses at a moment’s notice should the need come about. On the other hand, multiple spreadsheets just waiting to be infected with human error along with the threads and threads of email communication don’t contribute to the recipe for success.

A Few Other Things to Consider

Maintain Balance

No matter how good your MBO program is, or the amount and quality of communication you have around it all, goals and bonuses will always invoke pressure. So, it’s important you dial back the pressure when it comes to meeting goals, and turn up the balance between achieving those objectives and achieving them in a manner you’d be proud of.

Specifically, goals shouldn’t be presented as “by any means” necessary. While you should push employees to meet their targets, also be mindful of any language that might encourage your people to cut corners or act dishonestly. One way to ease the pressure could be breaking goals down into smaller chunks, to the point where an employee missing one out of three or four smaller targets isn’t as big of a financial deal as missing one large goal making up the majority of the bonus.

Keep Goals Within Reach of the Individual

This isn’t the time for team or departmental goals. Meaning, the achievement of the MBO bonus should be controlled (or at least mostly) by the individual, without having to heavily rely on others.

Now of course, realistically, there are very few tasks that can be completed in a vacuum. Just be sure to not set an individual goal like “increase sales in region xyz by 20%” if the region’s total sales are made up by multiple individuals. If Sales Rep Samuel increases his sales by 20%, but the others fall short, so does the goal, which isn’t fair to Sales Rep Samuel. More on MBO examples.

Again, Follow Through is Key

This was alluded to above, but it’s worth re-stating in a different manner, to close this out. No matter the technology used, any goal that is simply stated and then not revisited until review time is bound to fail.

With it being January, we are all too familiar with setting big resolutions, going hard at them for a week or so, and then letting them fade. But, haven’t you found that when you hold yourself accountable, put together means of keeping track of progress, host regular check-ins with yourself, and celebrate the small victories, you see progress? You should adopt the same attitude when it comes to the goals and MBO bonuses you set for your employees.

Unfortunately, even if you’re good 80% of the time, but fail to follow through with that last 20%, you’ll have nothing to show for it except frustration. While the examples above center around sales primarily, MBO bonuses can work for any employee in any industry. How could they improve your organization? 

  • Incentive Compensation
  • Sales Coaching and Motivation
Karrie Lucero
Karrie Lucero
Content Marketing Manager

Karrie Lucero is a Content Marketing Manager at Xactly. She earned marketing and journalism degrees from New Mexico State University and has experience in SEO, social media and inbound marketing.