MBOs and bonuses: designing an incentive scheme that delivers

At the end of the year, a familiar scene plays out in many companies. A manager communicates the bonus outcome, the employee does not understand why an objective was missed, a debate about the figures ensues, and someone concludes that the scheme is ‘not motivating’. In fact, the system has done exactly what it was designed to do: it has rewarded something that was not defined with enough precision.

Objectives must be within the individual's control

The first principle seems obvious, yet it is the most frequently ignored. An objective is effective only if the individual can significantly influence its outcome through their decisions and work. Linking an administration manager’s bonus to the company's overall revenue might make sense as a profit-sharing element, but it is unlikely to guide their daily behaviour. Conversely, objectives based on month-end closing times, data quality, or process improvements relate directly to their role.

This does not mean eliminating company-wide goals. It means balancing them: one portion of the incentive should be tied to collective results, another to what the individual genuinely controls. The weighting of each component should reflect the level of responsibility; a function head has a greater impact on overall results than a team member operating within that function.

Measurable does not only mean numerical

A measurable objective is one whose outcome requires no negotiation at the end of the period. It can be a number, but it can also be the completion of a project with pre-defined characteristics. What makes an MBO scheme fragile is an assessment based on impressions, such as ‘managed the team well’ or ‘was more collaborative’. If organisational behaviour is also to be rewarded—and it is often appropriate to do so—it is necessary to describe which specific behaviours will be observed and who will assess them.

Payment rules are as important as the objectives

Many disputes arise from what the plan documents leave unsaid. What happens if the person changes roles during the year? What if they are on long-term absence? What if external factors make the objectives unattainable? Is there a minimum threshold below which no bonus is paid? Is there a cap? Is the bonus payable if employment ends before the payment date?

These questions also have contractual implications. The way the scheme is formalised, communicated, and applied over time affects its legal nature and any rights that may arise from it. A bonus awarded annually based on vague criteria can become difficult to distinguish from a fixed component of salary. The scheme rules should therefore be drafted with care and reviewed before being issued, not after the first dispute arises.

Coherence with the role and overall pay

An incentive scheme does not exist in a vacuum. It is part of a wider pay structure that should have its own logic, comprising levels, superminimi (individual pay supplements above the collective-agreement minimum), and pay rises. If variable pay becomes a way to compensate for a fixed salary perceived as low, it ceases to guide performance and becomes an annual entitlement claim. The same occurs when a newly promoted manager is given the same MBO plan they had as a specialist: the incentive fails to reflect the change in role being asked of them.

Before introducing or reviewing an MBO scheme, it is therefore best to start with a simple question: what decisions do we want this person to make differently? If the answer is clear, the objectives will follow. If it is not, no calculation formula can fix the problem.