How to Unlock the Power of MBOs for Sales Compensation Success
Are you using Management by Objectives (MBOs) in your sales compensation programs without seeing the results you want?
While the concept is sound, MBOs often fail to drive the desired sales outcomes due to poor execution. The primary issue lies in that MBOs often focus on activities rather than results — and the wrong activities at that.
In this article, we delve into how to rethink MBOs for sales incentives and explore effective ways to execute them for your sales team. The goal is to identify a more practical approach that aligns MBOs with overall business objectives and in turn drives the desired outcomes for your business.
The Problem with Using MBOs for Sales Incentives
Management by Objectives (or MBOs) all too often get a bad rap when included in sales compensation programs.
The argument against them is relatively simple: Instead of a traditional sales compensation plan that pays for performance against a sales target, MBOs pay for activities that often do not drive sales outcomes.
There is a lot of truth to this – many organizations use MBOs ineffectively and end up with objectives like:
- “Enter 100% of opportunities in the CRM and keep them up to date”
- “Complete three sales training courses”
- “Take five clients out for dinner to pitch them on our new product XYZ”
When sales managers are asked to set MBO objectives without a framework, governance model, and support, they often fall flat.
In many cases we end up with metrics where the vast majority of sellers get paid 100% of their target, effectively creating a disguised base salary without a solid correlation to performance, leaving sales compensation administrators questioning if the plan is driving results at all.
What if there was a better way to think about Management by Objectives?
Rethinking Management By Objectives for Sales Incentives
MBOs are usually thought of in the context of activity metrics vs. results metrics. We use MBOs to pay for activities, and we use sales metrics (commissions, % to quota, etc.) to pay for results. This is somewhat flawed.
When looking at MBOs, we should be focused on the level in the sales organization at which they are defined. Front-line Account Executive’s objectives for the quarter are typically not defined by the CRO or Sales Operations team as part of the overarching sales compensation program. Individual sales managers usually set these.
That puts the responsibility for defining the requirements to earn that portion of the reps’ earnings in the hands of the individual (the sales manager) closest to them, who arguably has the best understanding of the tactics needed for that seller to reach their goal.
If left entirely unchecked, that can be unsuccessful, but with the right processes, tools, and training in place, it can be extremely powerful.
When done right, MBOs start to look like this:
- Close 3 out of 4 identified high-risk renewal opportunities for the quarter
- New product launch: Generate and move five opportunities past stage two that include the new product line and $600K in corresponding pipeline value
- Bring in $175K in early renewal opportunities this quarter
As you can see, when MBOs are done correctly, they can be highly results orientated.
Some characteristics of successful MBO metrics:
MBOs should be quantitative in nature, with a goal for a specific sales or sales-influencing result
MBOs need to support a seller in achieving their broader sales targets and be aligned with overall sales objectives
- Can be tracked and influenced
As with any component of a sales compensation plan, MBO objectives need to be trackable via trusted data sources and the seller must be able to influence the result
These types of objectives should never be the only component of a sales compensation program.
We have generally seen MBOs have the most success when:
- 60%—70% of target sales incentives are based on overall sales results/territory performance. This would be defined as part of the overall sales comp plan for a role and focuses on paying for overall sales performance.
- 30%—40% of target sales incentives are based on MBO objectives defined by sales managers. These objectives focus on more tactical acts the seller must do to accomplish their overall sales objectives. The MBOs provide somewhat of a roadmap to success at an overall level
MBOs have the ability to take a portion of a seller’s pay and align it to more tactical and individual metrics to help them succeed.
But what does it take to actually execute this?Organizations with successful MBO programs do not leave it up to sales managers to develop objectives from scratch. Create a set of MBOs that align with your strategic objectives and then allow managers to "riff" on those, choosing ones that fit… Click To Tweet
How to Effectively Execute Management By Objectives for Sales Teams
We think it takes 3 things to be able to effectively execute against this definition of MBOs for your sales team:
1) Strong MBO Governance
Organizations with successful MBO programs do not leave it up to sales managers to develop objectives from scratch.
Instead, at the beginning of the year the sales compensation or operations team will work with leadership to create a library of strategically aligned MBOs (often 20–30 templates) for sales managers to use as a starting point. That ensures alignment with broader organizational objectives and makes the objective-setting process more efficient.
If a sales manager wants to create their own objectives, this is encouraged, with the caveat that the sales compensation team must approve it to ensure it is well structured and aligns with the overall strategy.
Organizations with successful MBO programs put a significant amount of rigor around objective-setting, target-setting, and payouts to ensure objectives remain fair, equitable, and aligned.
After the performance period is complete, best-in-class organizations routinely analyze MBOs to ensure differentiated performance distribution. For any given group of sellers, some should underperform, some hit their targets, and some overperform. If all sellers hit 100% of their objectives, it signals a lack of effectiveness, and the objective should be reevaluated and reset.
2) Manager Training & Support
Sales managers must be trained on what good Management-By-Objectives look like and how they should think about selecting objectives to manage each of their sellers. The defined objectives are also a valuable opportunity for managers to work with their reports and map out what they need to accomplish to be successful for the period and how they are performing against these more targeted objectives.
3) Supporting Technology
One of the most challenging parts of managing an MBO program is the execution of the objective-setting and data-collection process:
- Each sales manager needs to set individual objectives for each team member
- Objectives and targets must be approved
- Results need to be collected from each sales manager
- Payouts need to be calculated
On top of all of this, we must provide each seller with ongoing (and ideally real-time) visibility into their performance against objectives and related payouts. It is virtually impossible to collect all this information from sales managers manually using spreadsheets, email, etc.
Align Strategy and Activity for Successful MBOs
When appropriately used, MBOs can be an effective tool in sales compensation programs, but they often fail due to a lack of alignment with broader organizational goals or the inability to tie activity and objectives to tangible outcomes.
To execute a successful MBO program, you need to invest in the right technology to support the end-to-end MBO workflow, automate data collection and transfer, and support a robust governance model.
By refocusing on results-oriented objectives that are aligned with overall business strategy and compensation and providing the sales team with the necessary technology and training to influence the results, organizations can successfully drive sales outcomes using MBOs.