Managing MBOs in Incentive Compensation Management

Management by Objectives (MBOs)

As the year end approaches, it’s the perfect time to delve into the world of Management by Objectives (MBOs) within Incentive Compensation Management (ICM). While MBOs are designed to motivate and align employees with company goals, they often come with their own set of challenges. Here are the top 9 MBO challenges, along with tips, to help you navigate these issues coming up in your compensation plans.

1. The Task of Subjectivity in Goal Setting

The most daunting MBO challenge is the subjectivity in goal setting. Unlike purely numerical targets, MBOs can be ambiguous, leading to disputes over what constitutes success. This lack of clarity can quickly turn into a problem when employees are unsure if they've met their objectives. Avoid this issue by setting clear, measurable goals!


Tip 1: Define SMART (Specific, Measurable, Achievable, Relevant, Time-bound) goals for each MBO to minimize ambiguity.
Tip 2: Involve multiple stakeholders in the goal-setting process to provide diverse perspectives and reduce subjectivity.



2. The Difficulty of Quantifying Qualitative Goals

Trying to measure intangible goals like teamwork or leadership can be challenging. When you can't attach a clear number to a goal, it becomes difficult to ensure fairness. Without clear metrics, bias can arise, and you might end up with dissatisfaction on your team.


Tip 1: Break down qualitative goals into measurable actions or behaviors whenever possible (e.g., number of coaching sessions delivered).
Tip 2: Use rating scales (e.g., 1-5) with clearly defined criteria to assess qualitative aspects.
Tip 3: Incorporate feedback from managers and direct contributors to provide a more holistic and objective evaluation of qualitative goals.



3. The Complexity of Scoring and Weighting

MBOs often involve multiple goals with different weightings, and managing this complexity can be overwhelming for compensation managers. If employees can't understand how their scores are calculated, they might feel confused about the process.


Tip 1: Limit the number of objectives and weights to avoid over-complication, focusing on the most impactful goals.
Tip 2: Use standardized scoring models and provide training on how the scoring and weighting work.
Tip 3: Use ICM software solutions to assist!



4. The Misalignment with Business Objectives

Misaligned MBOs can be problematic. If individual goals don't align with the company's strategy, you may find your team focused on tasks that don’t drive the business forward. Make sure your MBOs are aligned to avoid inefficiencies.


Tip 1: Cascade company-wide objectives down to individual goals to ensure alignment at every level.
Tip 2: Conduct regular check-ins to make sure MBOs remain relevant and aligned as business priorities and job functions change.



5. The Burden of Manual Data Entry and Administrative Work

Tracking MBOs can feel like an endless cycle of manual data entry, human error, and paperwork overload. Each objective tracked adds to the administrative weight, making it hard for compensation teams to keep up. If these processes aren’t optimized, your well-intentioned MBO program can become inefficient.


Tip 1: Implement automated tracking tools to reduce manual entry and errors. Use ICM software like Varicent to automate reminders and capture data, as well as input forms, workflows and reports to minimize administrative tasks.
Tip 2: Delegate tasks and streamline processes by letting managers enter MBOs directly into your ICM system, eliminating the need for multiple touchpoints and reducing administrative burden.



6. The Task of Tying MBOs to Payouts

Connecting MBO achievement to payouts can be tricky, especially when there are different payout tiers and variations. Clear communication is essential to ensure employees feel their rewards are fair.


Tip 1: Clearly communicate how MBO achievements tie into payout calculations from the start.
Tip 2: Use a tiered payout structure where different levels of achievement correspond to specific payout percentages.



7. The Lack of Visibility and Transparency

Without clear visibility into their MBO progress, employees can feel lost - effective communication about MBO goals, expectations, and progress is crucial. This lack of transparency can leave them frustrated and disengaged, creating an atmosphere of uncertainty.


Tip 1: Provide employees with real-time dashboards that show progress against their MBOs and regularly communicate MBO goals and expectations through team meetings, emails, or internal platforms.
Tip 2: Encourage two-way communication by allowing employees to provide feedback on their MBOs.



8. The Dread of Adjusting for Mid-Year Changes

Business conditions can change rapidly, making mid-cycle adjustments to MBOs a complex task. To avoid causing uncertainty and dissatisfaction among employees, it’s essential to handle these changes thoughtfully and transparently.


Tip 1: Establish a formal process for adjusting MBOs, including clear guidelines on when and how changes can be made.
Tip 2: Communicate changes promptly and explain the reasons behind them to maintain trust.
Tip 3: Allow flexibility in objectives from the start, building in contingencies for potential changes.



9. The Task of Integration with ICM Systems

Many ICM systems are designed for numerical sales metrics, and trying to force qualitative MBO data into them can be like trying to fit a square peg into a round hole. This process often requires custom workarounds that can be difficult to maintain.


Tip 1: Choose an ICM platform that is designed to handle both quantitative and qualitative data for MBOs.
Tip 2: Work with system experts to customize your ICM system for effective MBO tracking and evaluation.

The Final Word: Executing the MBO

Managing MBOs within ICM can be difficult, but by understanding these common challenges, you can prepare yourself to face them head-on and avoid overwhelm. With a clear approach, transparent communication, and the right tools, you can enhance your MBO management and transform your incentive compensation program into a success.

Workcentive’s Consultants can help examine your MBO process, and work with you to implement MBOs into several of the leading ICM software systems.