There are two sure things about compensation plans based on management by objectives (MBOs): not everyone likes them, but almost everyone will have to consider using them at some point.
A sales compensation plan should motivate the entire sales force, retain top performers and pinpoint weak salespeople. But companies might have difficulty motivating and evaluating the sales force with a “traditional” plan because they lack proper data to measure sales. Or a traditional plan might not work when companies need to give incentives for actions outside of sales.
That’s where MBOs come in. MBO-centric sales compensation rewards salespeople for meeting objectives rather than (or in addition to) exceeding sales quotas. These features make MBOs an effective way to motivate the field when other methods are ineffective or insufficient.
Despite MBOs’ great utility, plan designers might find MBO plans too vague or difficult to communicate to the field, fear that they will “pay everyone the same” or worry that MBOs will create major administrative headaches.
We have seen some of these issues materialize with MBOs and realize that MBO plans are not always the right solution. But when the situation calls for them—and when they are designed and implemented properly— MBO-based sales compensation plans can be powerful tools for motivating and retaining the sales force.
MBOs Have Their Time and Place
Well-designed MBOs are an excellent means to motivate and retain the sales force under certain conditions:
- When a company has indirect or insufficient data that limit the ability to measure individual sales performance.
- When promotional activities like direct-to-consumer advertising affect sales results, such as consumer products representatives selling to major chain stores.
- In engagements that include team selling.
- For customer-facing non-sales roles.
- When a product sales cycle does not fit a quarter or even a year conveniently yet the company still must motivate its salespeople via incentive pay.
Take, for example, a technology company preparing for its first product launch targeted at enterprise customers. The company would not generate immediate sales, and the sales cycle for a single customer could take multiple quarters. Salespeople would play an enormous part of the launch’s success or failure, yet a traditional incentive plan (based on sales numbers) would not reflect the sales force’s efforts during the product’s introduction.
In this case, an MBO-based incentive plan was a good fit. With a long sales cycle and a customer base that needed to be built from scratch, salespeople would have to educate and build a business case to prospective customers (but not necessarily log early sales).
Building a Successful MBO Program
Inorder to put its MBO plan on a solid footing, the company implemented its plan in five steps, which are applicable for any company considering an MBO-based plan:
- Involve the entire team. A collaborative workshop—in which managers work with the sales force to define “good” objectives—is an extremely effective means to gain employee acceptance and ensures objectives meet local needs. Because many companies already hold group sessions each period to review and create business plans, extending the meeting two hours to create MBOs is an excellent use of time. By bringing the whole team together, the company can establish a consistent approach to try to ensure comparable and fair measurements.
- Drive results. Some organizations rely on MBOs unnecessarily when sales might be a better measure of performance. If a company can measure performance based on results—and sales representatives’ actions affect results directly —it should probably go this route and not use MBOs. It is important to be as results-oriented as possible in designing objectives. The goal is to create objectives that are as close to being measurable as possible (see Figure 1, click on figure for larger view).
- Develop strong objectives. Incentive plan designers might overlook the need to develop clear and tangible objectives. Because the “objectives” part of MBOs strike some managers as amorphous, they might not put enough effort into developing them. At the heart of developing strong objectives are methodologies like the SMART framework, which help ensure that goals are Specific, Measurable, Attainable, Results-oriented and Time-bound.
It is important not to overload an MBO plan with objectives. A rule of thumb is to have each objective account for at least 10 percent of total compensation.
- Tie to ratings. Managers can become frustrated with what they perceive as a “pay everyone the same” culture and an unmotivated sales force with MBOs. Well-designed objectives can be integrated with a rating scale that allows management to differentiate performance and reward each group based on performance against agreed-on objectives (see Figure 2, click on figure for larger view).
- Centralize and automate. Centralization for setting and rating objectives is crucial. Sometimes programs fall apart when companies have disparate MBO programs that use separate technology, spreadsheets and systems. It is important that companies use uniform processes and rewards and have a centralized, automated solution. In addition, centralization eliminates possible governance and control issues that accompany poorly administered plans.
The technology company in the example followed these steps when implementing its MBO-based plan. Using corporate objectives refined in workshops, the company had two primary objectives for its enterprise sales team. First, the sales force had to educate customers, so it was tasked with holding seminars and meetings with potential enterprise customers. These events would not necessarily lead to immediate sales but would lay the groundwork for future purchases.
The second objective entailed developing relationships with partners who could handle product delivery and installation, stemming from the company’s desire to avoid delivery and installation issues that could alienate customers. This meant that the sales force needed to forge relationships and map out delivery and installation processes with possible partners in their territories. The company centralized its MBO operation using a web-based tool that ensured consistency across sales territories and prevented the administrative nightmares that some managers within the company had feared.
Ultimately, the company established strong customer relationships because it had designed and implemented its MBO plan properly. The sales force’s efforts created a customer base of eager first movers who bought the company’s enterprise products. And because salespeople had laid the groundwork with delivery partners, the company’s new enterprise customers were extremely satisfied with the service.
Meanwhile, the MBO plan, hammered out in part by salespeople themselves, was so popular among the sales force that the company retained its best salespeople in larger numbers than expected.
Because it had approached MBOs the right way, the technology company achieved its initial goals, motivated the sales force and rewarded salespeople appropriately. Management ran the program without administrative hassles or issues over control.
Like many companies, the technology firm approached MBOs with a mixture of optimism and wariness. MBO-based incentive plans are often an acquired taste. But after results start rolling in, corporate leaders usually are glad they made the effort. One senior manager for an MBO incentive plan in his division commented, “The process and results were excellent. I wish we could do this for every department in the company.”
Michael Martin is an associate principal with ZS Associates, a global consulting firm specializing in sales and marketing issues. He has worked extensively on incentive compensation planning and design. Kyle Heller is a consultant with ZS Associates who has helped create and implement motivational sales plans for numerous companies.
Paying Sales Reps for Customer Satisfaction, SHRM Online Compensation Discipline, December 2010
Most U.S. Companies Expect to Revise Sales Comp in 2011, SHRM Online Compensation Discipline, November 2010
May the Sales Force Be with You, HR Magazine, September 2010
Sales Compensation Planning for HR Professionals, SHRM Research, June 2007
Performance Management Series Part III: Management by Objectives, SHRM Research, May 2004
SHRM Online Compensation Discipline
SHRM Salary Survey Directory
SHRM Compensation Data Center
SHRM Metro Economic Outlook reports