Understanding Management by Objectives (MBO)

When Peter Drucker coined the term MBO in his 1954 book titled The Practice of Management, little did he know that it would cause such a stir in the world of management. It is easy to understand the enthusiasm. On paper, MBO makes a lot of sense! 

The pivot of any business are its employees. Therefore, when Drucker suggested that involving them in setting business goals means they are more likely to share top management’s objectives, it was as if the Pandora’s box was suddenly opened and all these questions that were otherwise embedded in the silos of old management practices were suddenly out in the open. 

So, what is MBO? 

To put it simply, MBO is a performance-based reward system in which managers and employees work in collaboration to set goals. 

The genius of Drucker is commendable. Instead of coming up with complex management mantras, he set forth several easy principles that management could follow- 

  • Objectives are laid out on an individual basis by the management and the employee
  • These objectives should be challenging but achievable
  • Employees should ideally receive daily feedback
  • The focus is on rewards rather than punishment
  • Personal growth is emphasized 

The aim of MBO is to align targets with the organization’s objectives, and team members earn based on how effectively they complete the goals defined in their individual MBO program. 

Each employee's MBO plan should clearly define their tasks and workflows, and ensure that these goals are emphasized from day one. 

While MBO looks perfect on paper, its performance has been skewed. A weakness pointed out by many critics is that this style of management places more focus on the setting of goals to attain objectives, but fails to provide a systematic plan to do so.

Prominent critics of the theory, such as W. Edwards Deming, argue that ‘setting particular goals like production targets leads workers to meet those targets by any means necessary, including shortcuts that result in poor quality.’

Therefore, the streamlining the process of introducing MBO and following best practices becomes a top priority for most players. 

A step-by-step guide for MBO optimization-

MBO optimization cannot be achieved overnight! Refer to these easy-to-follow steps that we’ve put together for you- 

  1. Revise the organizational objectives for the entire company. This is basically a broad overview of what the company’s goals are and should be derived from the firm’s mission and vision.f
  2. Translate the organizational objectives to employees. In 1981, George T. Doran used the acronym SMART (specific, measurable, acceptable, realistic, time-bound) to express the concept.
  3. Stimulate the participation of employees in setting individual objectives. After the organization’s objectives are shared with employees from the top to the bottom, employees should be encouraged to help set their own objectives to achieve these larger organizational objectives. This gives employees greater motivation since they have greater empowerment.
  4. Monitor the progress of employees. In step two, a key component of the objectives was that they are measurable for employees and managers to determine how well they are met.
  5. Evaluate and reward employee progress. This step includes honest feedback on what was achieved and not achieved for each employee.

MBO: Red Flags

  • As MBO is focused on goals and targets, it often ignores other parts of a company, such as the culture of conduct, a healthy work ethos, and areas for involvement and contribution.
  • Strain is increased on employees to meet the goals in a specified time frame.
  • Employees are encouraged to meet targets by any means necessary, meaning that shortcuts could be taken and the quality of work compromised.
  • If management solely relies on MBO for all management responsibilities, it can be problematic for areas that don’t fit under MBO.

Your Edge: Automation with Kennect!

A Management by objective program should be diverse and dynamic, and chances are that your employees will  spend too much time writing emails and spreadsheets. Kennect’s fully automated ICM solution leverages a data-driven approach to build, run and automate your incentive compensation plans to create transparency and achieve operational efficiency. This provides uniformity across all departments and sales regions, streamlines operations and practically eliminates the risk of human error impacting remuneration.  

Book a demo with us today to learn more about how Kennect can help you optimize your MBO plans!

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