MBO + KSI + KSO = How to Turn IH8U into IHEARTU?
Management by Objectives (MBOs), Key Sales Initiatives (KSIs), Key Sales Objectives (KSOs) – No matter what acronyms they are assigned, objectives based incentive pay programs or components within the sales compensation plan tend to be disliked by most, if not all; Sales people don’t like that they are often all or nothing, capped, or paid only once a year; Finance and Sales Operations view them as too “squishy” and as a “gimme”; and management finds setting objectives burdensome and often view them as ineffective and not differentiating enough when it comes to pay for performance.
Still, according to a recent study we conducted of 33 companies, 40 percent used objectives based pay for a few of their plans, with 18 percent using them exclusively. Over 50 percent of these companies expressed dissatisfaction with the process of setting and measuring the objectives. We believe there is a place in the sales compensation tool kit for these types of programs, but they need to be focused on the right type of selling role, structured in a motivational way, monitored and effectively communicated, just like any other incentives.
Some key criteria exist to ensure that using objectives gives you more proverbial juice from the managerial squeeze. First, let’s review when it might be appropriate to use them, then we will address the how and how often.
WHEN – We have seen two important selling situations where we consider objectives in a pay plan to be particularly applicable;
1) A completely new environment or market where it will take time to create awareness, develop the sales funnel, and start to close some business
2) Longer term, strategic account or business development type sales relationships, where the sales cycle timing is unknown, yet you want to sustain the focus and motivation of the individual performer.
In both cases, there is a fair amount of uncertainty, yet what is likely to be known is the kind of activities that need to take place, and the milestones that need to be reached, in order to get to the desired end result – generating bookings and revenue.
HOW – In terms of the structure of these programs, we advise our clients to follow these guidelines:
- Don’t have too many objectives – two to three should suffice
- Make sure each objective is under the control of the salesperson
- Make sure the objectives can be clearly observed and truly measured – use quantifiable metrics or ones that can be discernibly scored and evaluated – Stay away from those that can be wide open for interpretation such as, “Get to know the buyer Joe,” (which, by the way, is a real-life and poorly written example we have seen)
- Evaluate the potential future impact of the metric as well as its timing – E.g. focus on selecting a metric that leads to a high probability of a future booking or revenue hit, but recognize it may not occur in the current fiscal or performance period
- Each objective should have a target, as well as a minimum and maximum outcome identified – By having a range of potential outcomes, you can introduce a partial payout where at least a portion of the target incentive (e.g., 50%) can be earned and an upside (e.g., 150%) can be achieved– This creates better results than a simple “yes” or “no”, all or nothing type measure – Note that the upside on objectives components tend to be more conservative than those for financially oriented ones
- Acknowledge that there will be a cap – With financial metrics, it’s easier to continue to have upside and no cap, as the payouts are hopefully self-funded if structured correctly – In an objectives based situation, that correlation is less exact, so a cap is appropriate
HOW OFTEN – In terms of how often to pay out, a variety of options exist, including “as achieved”, which less than 10% of our study participants reported. Over 60% of companies in our study reported paying quarterly. We believe more frequent payouts, if progress or completion is measureable, are preferable from a motivational aspect. And in many cases, objectives should be re-set at the quarterly or mid-year mark, particularly if the measure is more short-term in nature and the needs of the business are volatile.
Whatever you might call these plans, if you follow the guidelines we suggested above, you should be able to minimize the number of H8ers and increase the number of “Hearters”! There can indeed be an appropriate time and place to use a well-structured MBO type component in your sales compensation program.