Management by objectives (MBO) is a highly collaborative approach to goal-setting—and it can lead to some pretty impressive results.
Karen is the marketing manager at a mid-sized tech company, and the company’s leadership team has just set an organization-wide goal of driving more paid app signups in the second quarter.
Following that meeting with the other managers and executives, she takes that information back to her own marketing team to share this new objective.
She explains that paid app signups are their main source of revenue and that—in order to have the financial stability they need to pursue other projects—they need to have more money coming in the door.
It’s all hands on deck, and each team is tasked with somehow contributing to growing the number of paid signups. So, Karen sits down with each of her team members to discuss what individual goals they can set, how those will support this larger objective, and how success will be measured.
For example, the social media team will channel some budget into retargeting ads. The content team will write supporting blog posts to highlight the features of the paid version of the app. The email team will craft a campaign focused on converting free users.
Each of Karen’s team members were involved in their own goal-setting, are equipped with the knowledge they need, and are also highly-motivated to ensure each of their individual contributions are successful.
While you might not know it yet, that anecdote is actually management by objectives at work. Let’s cover what you need to know about this management model.
What Is Management By Objectives?
You’ll also hear management by objectives (MBO) referred to as management by results (MBR), but know that the two terms really mean the same thing.
MBO certainly isn’t a new concept. It was first popularized by Peter Drucker in his 1954 book, The Practice of Management and involves defining company-wide goals and then using those to set objectives for individual team members that will support that larger goal.
It sounds like what a lot of leaders do naturally, right? However, as ToolsHero explains, Drucker also outlined other MBO criteria that must be met, including:
- Objectives should be determined with the employees
- Objectives should be formulated at both quantitative and qualitative levels
- Objectives should be challenging and rewarding
- Employees should receive regular feedback on how they’re progressing
- Employees should receive rewards for achieving objectives
- Growth and development should be prioritized over punishments
Put simply, MBO is used to improve organizational performance by identifying important goals that are agreed upon by both leaders and employees. It’s up to the leaders to also monitor and reward progress on those objectives.
Management By Objectives: The Framework
The premise of MBO might seem simple—and honestly, it is. However, there is a five-step framework that leaders should follow in order to make MBO work effectively for them and their teams.
1. Set and review the organizational objective.
As mentioned in the anecdote above, it all starts when leadership or management outlines a specific goal that they’d like the company to achieve.
For best results, leaders should be as specific as possible in this step so that all of the necessary information and context is ready to be passed down to employees. It can be helpful to use the SMART goal framework to ensure that objectives are specific, measurable, attainable, relevant, and time-bound.
ORGANIZATIONAL GOAL EXAMPLE: Drive at least 1,000 new paid app signups by the end of the second quarter.
2. Translate those objectives to employees.
This is really the crux of MBO, yet too many leaders make the mistake of assuming that they can outline a company objective and employees will fill in the blanks and put in the legwork to figure out how that relates to them individually.
MBO is a highly-collaborative approach, and leaders need to actually talk about those objectives with employees. At this point, employees can ask questions, make suggestions, and generally participate in a discussion about the objectives.
After doing so, the leader and employees should work together to come up with individual objectives that support that company-wide goal—as well as a plan for how they can achieve them. Note that it’s highly important that employees are involved in the goal-setting process at this stage.
“Such a connection between day-to-day tasks and overarching objectives give employees direction and guidelines for situations where a policy or procedure has not been defined,” says Todd Christensen, Founder and Chief Consultant at Todd R. Christensen Consulting.
“When employees connect their jobs to the organization’s objectives, it gives them a sense of purpose and adds meaning to their work. This connection is the foundation of employee engagement that minimizes turnover and leads to employee satisfaction and increased production.”
3. Monitor progress and performance.
Leaders can’t just set the individual goals and assume employees will take them and run with them. They should be prepared to closely monitor progress and performance and offer guidance and assistance when necessary.
4. Evaluate performance.
At the end of the set time period, the leader and employee should meet to discuss performance and whether or not the employee has met the objective that was set.
5. Reward performance.
Hard work shouldn’t go unnoticed. Employees who have met their objectives should be rewarded with raises, promotions, recognition, perks, or increased responsibility.
The Upsides and Downsides
Now that you understand the basic premise and the steps involved with MBO, let’s cover some benefits and drawbacks of this management approach.
1. Involving employees in their own goal setting increases motivation.
When employees are handed an objective without any sort of involvement or explanation, it’s understandably tough for them to muster up any sort of motivation.
However, research shows that involving them in the goal-setting process significantly improves their level of engagement in their work. In fact, employees who are involved in their own goal-setting are up to four times more likely to be engaged than other employees.
“As a result, they are more mobilized and motivated to work,” shares Karol Nowacki, Outreach Team Lead at ResumeLab and Zety. “After all, it’s their idea. Even if something goes wrong, they feel obliged to try to push harder and bring a task to the end. MBO is, to some extent, not only a management system but also a motivation system.”
2. Team members have visibility into how their work connects to the larger goals.
Research from Harvard Business Review reveals a somewhat shocking statistic: 95% of employees don’t understand their company’s goals and strategies.
This is where MBO is really helpful. It allows team members to draw those parallels between their own work and the accomplishments of the company.
This process “doesn’t make the employees feel objectives are deprived of any meaning in the end-to-end process or work cycle,” explains Siddhartha Gupta, Chief Executive Officer of Mercer Mettl, an HR technology company and leading talent measurement firm.
This also gives team members a greater sense of purpose and meaning, which is incredibly important to employees. In fact, a reported nine out of 10 people are willing to earn less to do more meaningful work.
With MBO, there’s obviously a lot of emphases placed on achieving the end result. That’s why the biggest criticism of this approach deals with focusing too much on the outcome, and not enough on what it takes to achieve it.
Yes, monitoring employee progress is an important step of the process, but it’s also one that’s easy for leaders to lose sight of.
Some critics claim that MBO might be twisted to mean that employees should achieve their goals by any means necessary—even if it means shortcuts, destroyed team morale, or lower-quality output.
How to Make the Most of MBO
MBO is undeniably powerful for uniting a team, boosting motivation, and balancing organization-wide objectives with individual goals.
The below tips from several different managers and leadership experts can help you leverage this management method for maximum impact.
1. Think carefully about the objectives you set.
“The most important thing in attempting to manage people by objective is to be extremely careful of choosing which objectives are the right ones,” says Amie Devero, Managing Director of Amie Devero Coaching and Consulting.
“It’s very easy to craft objectives that are simply goals reflecting increases of basic indicators, like sales or budget items. Managing by shallow objectives like that will cause employees simply to work on the number, not on the substance that matters and is reflected by those numbers.”
“When objectives are tied to a deeply thoughtful and testable strategy, and employees fully understand their role in achieving the strategy’s goals, then the objectives have real meaning. When that is the case, MBO makes sense and can be powerful,” she adds.
2. Understand how you’ll measure progress.
Remember, MBO isn’t a “set it and forget it” sort of approach. It requires dedication from the leader to constantly monitor progress and keep that goal top of mind for everybody.
“We often start with a goal but as the quarter progresses we start getting distracted,” says Krish Ramineni, CEO of Fireflies.ai. “Management by objectives only truly works if you see it through.”
“In my case, that meant setting a goal and measuring outcomes and impact throughout the quarter every single week. As managers, we get so busy with putting out fires and getting in the weeds that we lose track of overall department objectives and individual objectives.”
“One thing I like to do at the start of each 1:1 meeting or a team sync is have a live dashboard of the KPIs we are tracking and work backwards from there,” he adds. “Every activity the team or individual performs needs to help move that metric. Even if the progress is gradual, I find it extremely important to look at where we were one month ago versus where we are today.”
3. Be prepared to lend support.
Similarly, leaders need to be prepared to step in and offer support and guidance to team members whenever necessary. They shouldn’t expect to work with employees to set the objective, and then leave them to achieve it totally independently.
“Leaders must not expect MBO to be a magical potion to improve organizational performance,” explains Shashank Shalabh, CEO of OmniDigit.
“Without doubt, MBO improves motivation and commitment among employees and also facilitates better communication between management and employees. However, as leaders, if we do not clarify the objectives and give our support to the organizational objectives, MBO would not yield desired results.”
4. Know how you’ll deal with failure.
MBO prioritizes growth and rewards over reprimands. But it’s still possible to outline potential consequences or reactive measures—without developing a punitive system for when people miss the mark or don’t meet an objective.
It’s important that leaders remove the mystery and that team members are in the loop about what happens when a goal isn’t actually accomplished.
“Setting objectives is easy. So is rewarding people when they meet or achieve them. The tough part is holding people accountable when they miss their goals or objectives,” says Lee Eisenstaedt, Founder of Leading With Courage Academy. “Many leaders seem to have an unlimited supply of ‘becauses’ that justify their rationale for not holding someone accountable when they do not [meet] their commitments.”
“For an MBO system to have integrity, the objectives need to be thought of as contracts and the rewards and consequences associated with them have to distributed fairly and consistently. When someone meets or exceeds their objectives, they should receive the reward that was promised. When that same person misses an objective, even when they are a star performer, the rules should be applied to them too.”
“When this doesn’t happen, the credibility of the program and the trust in the leader responsible for it is reduced, sometimes to the point from which there is no recovery,” he continues.
When Done Right, Management By Objectives Can Boost Morale and Motivation
Goals are a staple of the business world, which means that many leaders and organizations are already using some aspects of MBO without even realizing it.
However, it’s when they follow the prescribed steps—especially when it comes to involving team members in the goal-setting process—that they’ll experience the best results.
So, the next time you need to rally your team members around a company-wide goal, take a cue from Karen and her marketing team and use management by objectives to increase accountability, improve transparency, and give your employees greater motivation and a sense of purpose.