Management by Objectives: Definition, Steps & Benefits

Home » Resources » Management by ObjectivesUpdated: July 19, 2022

This is a guide to management by objectives.

Management by objectives is a process where employees and their supervisors identify common goals and work together towards those objectives. This management practice involves a continuous evaluation and improvement of the process. The purpose of this strategy is to create a practical guide for employees to achieve organizational goals. Management by objectives is also known as MBO or the MBO process.

MBO is a subtopic of management styles. For more advice on the topic, check out these lists of management books and books for new managers and this guide to the differences between managers and leaders.

This article covers

  • the definition of management by objectives
  • management by objective steps
  • key features of MBO
  • benefits of management by objectives
  • examples of management by objectives

Here is what to know.

Definition of management by objectives

MBO is a management practice whereby managers and subordinates agree to work together towards common goals. The employees and the supervisors identify and set these goals as a subset of the organizational goals and include individual employee goals in the plan. Employees and their supervisors then align the two sets of objectives, determine the expected results, and finally set the criteria for achieving those goals.

In the MBO process, the supervisors are the overseers, and other employees are the major players in executing the process. Supervisors’ roles include assigning responsibilities to each individual, assessing how closely employees follow the set criteria, and continuously monitoring and improving the process.

Management by objective steps

Management by objectives is a systematic process comprising five major steps. These steps are well defined and have a clear purpose, as described below.

Step 1: Defining organizational goals

This initial step of the MBO process cycle is critical because it helps determine desired outcomes and guides managers on creating new reasonable goals.

To set up relevant goals, managers need to review the company’s overall objectives, mission and vision statement, and core values. These concepts are rich sources of guidance on goal setting and are necessary for the MBO process in any company.

Managers also need to consider setting achievable objectives within the set timeline when setting the new goals. An excellent tip to keep in mind is splitting large plans into smaller, manageable goals.

Here is a list of goal setting activities to try.

Step 2: Defining employees’ objectives

Subordinates play a vital role in this second step. To define employees’ objectives, each staff gets the chance to set personal goals in relation to the firm’s overall goals. An employee’s objectives can target career accomplishments that also match the firm’s goals. For example, a marketer may increase their social media presence by attracting ten thousand followers.

Once the employees have prepared personal plans, the next step is to discuss those goals with supervisors. The supervisors assess the employee objectives and approve the targets that align with the organizational goals. If outcomes mismatch, then supervisors guide employees towards reconsidering the objectives based on employees’ expertise and the firm’s goals.

This step also involves managers delegating authority to qualified staff and defining the roles and responsibilities of each employee.

This crucial step involves employees in decision-making and planning. Thus, the process ensures that the employees remain motivated and engaged throughout the MBO cycle.

Step 3: Continuous monitoring of performance and progress

This stage involves reviewing employees’ performance in the MBO process.

Monitoring performance is critical to ensure employees stay on track to reach MBO goals. Considering that good objectives are SMART, in the sense that those goals are Specific, Measurable, Attainable, Realistic, and Time-bound, this monitoring stage helps to measure goals. For instance, supervisors may assess employee achievement vis-a-vis the scheduled timeline.

Monitoring performance should be ongoing. Supervisors who check progress can prevent any action from deviating from the main objectives. Supervisors can also identify any unforeseen needs and challenges and offer solutions. For instance, leaders can organize credit control training if a finance employee has trouble collecting overdue debts. Such a solution builds capacity and confidence in that employee to counter the challenge with debtors.

At this point, managers may also identify the weaknesses of the criteria used to measure performance goals.

Step 4: Evaluating performance

The primary role of the step is to judge employee performance and provide feedback.

In performance evaluation, supervisors rate how the employee performs compared to the objectives. A performance evaluation may take many forms. Some of the most effective methods of conducting evaluation include using interviews, filling in forms, observation, and the comparison of the expected versus achieved results.

For instance, managers may assess performance to gauge various parameters by answering the following questions

  • Did the employee achieve all the defined objectives?
  • Did the employee adhere to the company’s policies and practices?
  • Did the employee utilize the prescribed time to meet the objectives?
  • Did the staff face any obstacles? Were these obstacles communicated well?
  • Did the employee optimize allocated resources such as funds, systems, machines, et cetera?

After the evaluation, managers have a duty to provide feedback. Some of the most effective ways to deliver feedback are written reports, PowerPoint presentations, and one-on-one conversations. Good feedback encompasses management’s view of the whole process, judgment, and recommendation.

Check out this guide to giving effective feedback.

Step 5: Rewarding the employees

Rewarding employees is the ultimate result of the MBO process and the final stage of the cycle. This critical step holds the motivation and helps maintain the staff’s enthusiasm for achieving the management objectives.

Managers reward achievers in an initially agreed way. Good examples of rewards include compensating employees with bonuses, awarding salary increments, and offering employees chances for promotion.

Managers should ensure that the rewards are equitable and motivating. One strategy is basing the reward system on a fair and honest feedback. The tips accomplish important purposes, including improving employees’ loyalty and commitment to the company.

The majority of the organizations reward their employees annually, after a year-long MBO phase. After that, the next management by objective cycle begins. When the managers and employees set fresh objectives for the next season, it is in their best interest to incorporate lessons learned in the previous MBO process.

For inspiration, here is a list of corporate incentive program tips.

Key features of MBO

The entire management by objective process consists of unique features that make the management model unique and practical. Below are the MBO outstanding features

1. Goal precision

The success of the process relies on well-defined and specified goals.

2. Top-down collaboration

MBO ensures that managers work with their subordinates in planning, making decisions, and implementing the entire process.

3. Feedback

Management by objective uses feedback, which includes critiques of the process and managers’ opinions to enable continuous improvement.

4. Reward system

The MBO process sets a reward as motivation to encourage the employees to perform their best and win the prize.

5. Time frame

The objectives in the MBO model anchor on a given time, for example, quarterly or annually depending on the intensity of the goals and the achievability.

6. Life cycle

Management by objective is a continuous process. When the scheduled time frame elapses, one cycle ends, and the next begins.

7. Continuous improvement

Managers and supervisors can implement the lessons learned over time in previous MBO cycles to improve employees’ and company performance.

Benefits of management by objectives

The MBO process emphasizes achieving goals and has many benefits to an organization. Below are ways in which your organization can benefit by using the MBO model.

1. MBO encourages employee participation and engagement

Each step of the MBO process involves the participation of a supervisor, a subordinate, or both. The staff are involved in planning, goal setting, monitoring the process, and reviewing feedback, for example. Thus, MBO promotes employee participation and engagement.

Check out the best practices of employee engagement.

2. MBO promotes self-growth

The model allows employees to set personal goals and define career direction. Employees grow their professional expertise by setting goals aligning with acquired talents, competencies, and knowledge. Therefore the MBO process provides a platform for learning and developing skills.

3. MBO process enhances communication

The effective execution of this management model requires constant communication between employees and superiors. Communication applies when setting goals, collaborating on resource allocation, dealing with challenges, and during performance evaluation. Some of the gains from MBO communications include skills in active listening, negotiation, and oral and written communication.

Here is a list of communication games and books on communication.

4. MBO acts as a guide to achieving organizational goals

The first two steps of the MBO process involve goal setting. MBO requires employees’ objectives to match the goals of the organization. The overall process translates to meeting at least one of the company’s goals.

5. MBO doubles up as an employee performance appraisal tool

Employees determine the efficiency of the MBO process by measuring and judging the employees’ performance against expected results. The performance appraisal procedure allows the managers to pinpoint staff-related problems and correct those issues to achieve the goals successfully.

6. MBO is a motivation tool

Different employees get motivated differently. A combination of intrinsic and extrinsic motivation helps managers keep their staff’s morale high. MBO is effective in both motivation strategies. For example, the model uses a reward system as a financial motivation. Thus, the top performers gain while the poor performers do not. Similarly, by engaging staff in all the steps of the MBO process, the employees feel valued for their individual contributions and are intrinsically motivated.

Check out this list of motivation books.

7. MBO specifies individual duties

Management by objective is a process with multiple specificities. The model distinctively outlines the objectives, clarifies each employee’s duties and responsibilities, and sets up rewards. This kind of precision ensures that each employee knows the organization expects of them and prevents contradictions over overlapping roles.

8. MBO forms a guide for determining remuneration decisions

The award system is a direct way of rewarding employees with promotions and salary raises to deserving employees. However, steps such as continuous monitoring, evaluation, and feedback, are also essential for assessing employees’ performance and forming new, corresponding remuneration structures.

9. MBO increases efficiency

By aiming to score certain individual goals within a given time, employees come up with creative strategies to increase productivity.

10. MBO offers direction to employees on resource allocation

With clear employee duties and objectives, managers are able to assess the tools required to facilitate the MBO process. Therefore the model guides supervisors on the quality and quantity of resources to allocate to the subordinates for optimal usage.

Management by objective has continued to gain popularity with organizations since 1954 when Peter F. Drucker, the author of “The Practice of Management” introduced the term, MBO. The MBO is a practical model but it has its share of drawbacks, listed below.

1. MBO may cause strain on staff

This goal-oriented model may cause employees to strain beyond their limits to achieve the objectives. In adverse cases, the MBO process increases employee burnouts and stress.

2. MBO can promote unhealthy competition within the organization

Employees may become obsessed with achieving personal goals and getting the rewards at the expense of teamwork and collaboration.

3. MBO offers limited strategies for achieving objectives

MBO pivots on achieving goals but not the means. Therefore, there is a gap in outlining the short and long-term tactics for meeting those objectives.

4. MBO may undermine existing organizational culture

Managers may rely on MBO as the sole management model. This dependence can cause an override of professional ethics like cooperation and integrity.

To counter these drawbacks it is advisable for managers to combine MBO with other models that narrow the MBO gaps. Some good choices of management models to pair with MBO include

  1. Management by walking around, MBWA,
  2. Objective and Key Results, OKR
  3. Key Performance Index, KPI
  4. Balanced Scorecard

These models are quite easy to understand and implementing them alongside MBO help managers to achieve better results.

Examples of management by objectives

Here are some examples of management by objective goals and approaches in various departments.

Firm DepartmentsExample of MBO Goals
Administration
  • To increase social corporate responsibility activities by 5%
  • To improve occupational safety through training and putting up labels and signs
  • To increase automation by implementing new systems
Sales
  • To increase sales revenue by 15% by end of year
  • To introduce two revenue streams each quarter
  • To improve the number of repeat clients by 30%
Marketing
  • To convert 10% of landing page visitors into paying customers
  • To increase social media marketing campaigns with one extra post per day
  • To win at least one new high profile client every month
Product/ Manufacturing
  • To modify two major products with unique features that customers request
  • To launch an on-demand product every six months
  • To improve output efficiency by 15%
Research and Development
  • To increase customer satisfaction surveys from semi-annually to quarterly
  • To ideate product features to counter competition
  • To form strategic alliances with two competitive firms
Customer Service
  • To reduce queue waiting period by 20%
  • To reduce recurring customer complaints by 80%
  • To reduce cost per contact by 5%
Finance
  • To increase annual profit margins by 10%
  • To reduce loan interest by 15%
  • To slash costs by 8% through internal controls
Human Resources
  • To implement annual departmental training programs
  • To reduce employee turnover by 50%
  • To increase referral hiring by 10%

Conclusion

MBO is a management system that combines employee and supervisor efforts in making firm and individual objectives. This MBO model uses a top-down approach and consists of an easy-to-follow 5-step cycle.

The MBO is a useful model that has numerous benefits to the company, including motivating staff, increasing staff productivity, and optimizing resource allocation. The MBO model anchors on achieving the objectives within set time frames. Yet, the model can have negative effects on organizational well-being. For instance, the process may discourage teamwork and cause stress on employees. As a solution, the best way to use MBO is to supplement with other models like management by walking around, MBWA, to counter the model’s weaknesses.

Next, check out these lists of leadership books and tips for new managers.

We also have a guide to the matrix organization structure.

FAQ: Management by objectives

Here are answers to questions about management by objectives.

What is management by objectives?

MBO is a collaborative, goal-oriented management model. Employees and their supervisors decide the goals to accomplish and the standards for measuring, evaluating, and rewarding performance. This management approach focuses on individual employee results, usually assessed annually.

The MBO process involves comparing progress with projected results to assess individual performance. Finally, the employees get rewards for the successfully met objectives.

What are some examples of management by objectives?

MBO is One of the most practical approaches for achieving company goals. These goals can vary by department and role. For example:

  • Administration- To improve occupational safety through training and putting up labels and signs
  • Customer Service – To reduce queue waiting period by 20%
  • Human Resources – To reduce employee turnover by 50%

You can modify these examples to suit your organizational needs or set your objectives based on known gaps.

What are the steps to the MBO process?

The MBO management style is made up of a five-step cycle. Each stage has a distinct and clear requirement. Here’s a summary of activities in the MBO process,

  • Line managers set the organizational goals that they wish to achieve by the end year
  • Junior employees define career goals that match with the organizational goals
  • Supervisors conduct continuous check-ups of employees’ performance and progress
  • Managers evaluate performance and give feedback
  • Employees get the rewards for their efforts in the MBO process

The process ends with rewards results, then a new phase begins with setting fresh objectives.

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