What is MBO?
MBO (Management by Objectives) is a method where employee and manager agree a few measurable goals for a period. In compensation, MBO means a goal-based bonus: the bonus is paid according to which of the agreed goals the employee achieves. The idea was popularized by Peter Drucker in his 1954 book The Practice of Management.
In sales, MBOs are typically used for the parts of the job that commission does not capture: onboarding new customers, CRM data quality, a product launch, or goals for managers and sales engineers. An MBO is a type of performance bonus.
How an MBO bonus works
- Agree 3-5 goals for the period. Each goal must be specific, measurable and have a deadline.
- Weight the goals so they add up to 100%.
- Set the payout: either all or nothing per goal, or partial payout based on how close the employee came.
- Evaluate at the end of the period based on data, not impressions.
Example
An account manager has a quarterly target bonus of $3,000 split over three goals:
| Goal | Weight | Achieved? | Bonus |
|---|---|---|---|
| 1. All new customers onboarded within 30 days | 50% | Yes | $1,500 |
| 2. Renew 8 of 10 expiring contracts | 30% | No | $0 |
| 3. Next step logged on every open deal in the CRM | 20% | Yes | $600 |
| Total | $2,100 |
Calculation: $3,000 × (50% + 20%) = $3,000 × 70% = $2,100. With partial payout, goal 2 could have paid something if, say, 7 of 10 contracts had renewed.
MBO, commission and activity targets
| MBO | Commission | |
|---|---|---|
| Measured on | Agreed goals | Sales, revenue or margin |
| Payout | Per goal achieved | Percentage of sales |
| Suits | Roles where sales numbers do not tell the whole story | Roles with direct sales responsibility |
For meeting setters, activity-based commission can be a more direct alternative, because it pays per activity rather than per goal. An MBO bonus is one part of an employee's overall pay package, see total rewards.
Pitfalls
- Subjective goals: "be a good colleague" cannot be measured. Vague goals lead to arguments at payout.
- Too many goals: with 8 goals at 12.5% each, no single goal matters enough to change behavior.
- Easy goals: employees have an interest in negotiating goals that are easy to hit. The manager has to hold the bar.
Danish rules
An MBO bonus is a bonus and follows the rules for bonuses. For salaried employees in Denmark, for example, an employee who leaves during the financial year is generally entitled to a pro rata share of a bonus tied to that year (Salaried Employees Act, section 17a). See bonus scheme, and put the goals in writing, for example with our bonus agreement template.
FAQ
What does MBO stand for?
MBO stands for Management by Objectives. In compensation, it refers to a bonus paid on agreed goals.
How many goals should an MBO bonus have?
Typically 3-5. Fewer goals give each one more weight and make evaluation easier.
Can MBOs be combined with commission?
Yes. A rep can earn commission on sales and a smaller MBO bonus on goals that commission does not cover, such as onboarding or CRM quality.
How is an MBO goal measured?
With data you have access to, for example in the CRM. Write down in advance which report or field decides whether the goal is met. See also attainment.
MBO bonuses in Prowi
Prowi calculates bonuses and commission live from CRM data and shows the amount in the mobile app. Goals that can be measured on data can be followed through the period, and the statement goes through the same approval as commission. Book a demo.
In Prowi
Every term on this page is a rule you can write into a commission model in Prowi. The model reads the deal from HubSpot the second it closes, applies the rule, and the rep sees the result on their phone before the day is over.