Tag: MBO Compensation

Also known as a “bonus plan,” “quota plan,” “incentive compensation plan,” “performance based compensation plan” and an array of other terms, “MBO” literally means management by objective, and in practice refers to any compensation plan where total compensation is determined based on a “pre-set” formula tied to volume, gross margin, revenue or another objective metric or metrics. MBOs are commonly used for the employees working in sales, business development or the executive suite.

Employers like MBO plans because if the employee does not perform, then typically no additional compensation is due under the MBO plan, which helps the Employer match revenue and expenses. Employees love MBO plans because there is theoretically no limit on how much money they can make. These plans appeal to the enterprising, self-starter who wants to work hard, and get a clear, direct reward for his or her performance.

It all seems so easy, how can there be any problems? Issues arise when the performance period (whether quarter or year) comes to a close, performance has been delivered and it is time to measure performance and deliver on payment promises. For the employee, there is an obvious motivation to get as many transactions as possible to count towards their totals. For the employer, there is an opposing motivation to lower it payment obligations either by (1) aggressively applying the MBO by using any ambiguities to disqualify deals or (2) retro-actively revising the MBO outright (when management wishes to revise the MBO plan retroactively for any number of reasons — these revisions only mean one thing, compensation paid to the employees covered by the MBO plans, in general and in specific, is going DOWN.).

This situation occurs frequently across companies of all shapes and sizes and can quickly cause the employment relationship to deteriorate. In many cases, the employee will claim that the employer has received all the benefits (i.e. new revenue), and is now failing to deliver on it payment promises. Likewise, in such cases the employer will claim that the employee is counting improper deals, claiming credit for the performance of other employees and/or even engaging in unethical behavior!

If you find that your compensation plan has been retroactively revised, or if your employer has failed to pay bonuses or other compensation that is owed to you, we recommend that you consult with an attorney immediately.