MBO
An MBO is a bonus paid for achieving agreed objectives rather than a revenue number. Management by objectives sets a small group of specific goals for a period, each carrying a weight and a stated way of being judged, and pays against them. MBOs cover work that matters to a company and never appears on a sales report.
The objective reads: improve cross-team collaboration. It carries $1,500 at the end of the quarter and nobody in the building can say what finishing it looks like. That single line is where MBOs get their reputation, and the failure is one of drafting rather than of the instrument. The objectives that work are the ones somebody outside the relationship could grade from the evidence, without having been in the room.
MBOs earn their place where the work is real and the sales report cannot see it. A sales engineer whose technical win is invisible under the crediting rules. The rep opening a new market, where year one produces relationships and year two produces revenue. Any team asked to migrate an installed base off a retiring product, where success is a count of migrations and the revenue effect is neutral or negative on purpose. A pure revenue measure in any of those three either pays for the wrong thing or pays nothing at all, and pays nothing at all is how you lose the person doing the work.
The mechanics are a pool, a set of weights adding to 100%, and a rule for partial achievement. Partial credit is the part most often skipped, and skipping it turns every objective into a cliff: twelve installs pays in full, eleven installs pays zero, and a quarter of genuine work is written off over one unit. Stating up front that achievement is pro-rated between a floor and the target removes most of the end-of-quarter argument before it starts. Objectives that genuinely are binary should be flagged as binary when they are set, so nobody discovers it in arrears.
Budget MBOs at close to full payout. Declining one is a performance conversation, most managers will route around it, and a plan modelled at 70% on the objective portion and settled at 90% or better is the ordinary outcome rather than a scandal. If the intention really is to pay out only when something unusual happens, the objectives have to be drafted so that failure is visible to somebody other than the manager signing the form.
A weighted quarterly scorecard
A solutions consultant has a $4,000 MBO pool for the quarter across three weighted objectives. Two are countable from systems the company already runs. The third is a judgement call, which is the one to watch.
- Certified installs, weight 40%, 9 of 12 delivered
- $1,200
- Partner accounts launched, weight 35%, 2 of 2
- $1,400
- Pipeline hygiene, weight 25%, judged met
- $1,000
- Quarterly MBO pool
- $4,000
- MBO paid for the quarter
- $3,600, or 90% of pool
The first objective paid $1,200 rather than zero only because the plan stated that achievement pro-rates: 9 of 12 is 75% of a $1,600 weighting. The third objective paid in full on somebody's opinion, and if this rep ever disputes an MBO, it will be that one.
Objectives written in adjectives cannot be graded
Improve collaboration. Strengthen the customer relationship. Be more proactive on forecasting. Each of these will be written down in good faith and each becomes an argument, because there is no state of the world that clearly satisfies it and no state that clearly does not. The manager either pays it to avoid the conversation, which makes the objective free money, or declines it and gets accused of moving the target, which was never anywhere in the first place. Run a simple test on every objective before the period starts: name the artifact, the report or the count that would settle it. An objective with no answer to that question is a note of encouragement, and it should not carry money.
- What does MBO stand for?
- Management by objectives. In compensation, an MBO is a bonus paid against a set of agreed goals for a period rather than against a revenue target. Each objective carries a weight, the weights add to 100% of the bonus pool, and payout depends on how much of each objective was achieved.
- How is an MBO bonus calculated?
- Multiply the bonus pool by each objective's weight, then by the proportion of that objective achieved, and add the results. A $4,000 quarterly pool with an objective weighted 40% and delivered at 75% pays $1,200 for that line. Objectives assessed as binary pay their full weight or nothing, so the plan should state up front which objectives pro-rate and which do not.
Nearby terms
The long form lives in the guides: Plan templates.
Knowing the word is
the easy half
Commish pays mbo the way your plan describes it, shows the arithmetic on every line, and traces each payment back to the deal that earned it.