Management by objectives (MBO): Definition and process

The idiom “It takes a village” refers to the idea that success stems from collaboration. As a project manager, you experience this firsthand. You rely on your village—or your team—to complete projects. Companies also rely on the collective to meet their objectives. But how do team members stay motivated to work toward the objectives of others? 

Management by objectives (MBO) is a strategic approach to increase company performance by aligning company and team objectives. In this article, we’ll explain how the MBO process works. We’ll also discuss the pros and cons of using the MBO model.

What is management by objectives (MBO)?

Management by objectives (MBO) aligns team member goals with company objectives so team members feel more motivated and included at work. The MBO model, which Peter Drucker first published in his 1954 book "The Practice of Management," also emphasizes using reporting tools and performance reviews to monitor team member performance. 

MBO uses objective standards to measure team member and company performance. Objective standards outline what is fair, reasonable, or acceptable in an agreement. You can use these standards to assess team member productivity and identify opportunity areas within the team. MBO works because part of the MBO process involves management and team members aligning and agreeing on these objective standards.

The 5-step management by objectives (MBO) process

There are five steps to the MBO technique. Implementing this process involves creating organizational goals and turning those goals into a set of individual objectives that team members can follow.

1. Define organizational objectives

The first course of action is to define your organizational objectives. As a project manager, your job may be to co-create company objectives or translate company objectives to your team in an understandable way. You can use a business goals template to structure your specific goals at this stage.

2. Translate goals of the organization  into employee objectives

After you’ve defined the company’s objectives, use a top-down approach to translate the company objectives into individual goals for each team member. Make sure you’re using the SMART goals framework to ensure your team members’ goals are measurable and achievable.

When team members have personal goals that ladder up to larger company goals, they understand how they fit into the bigger picture. According to our research, only 26% of employees have a clear understanding of how their individual work relates to company goals and just 16% say their company is effective at setting and communicating goals.

3. Monitor performance and progress

As your team members work toward their specific objectives, you’ll need to monitor their performance. You can monitor progress of each team member by gathering success metrics from your project management tool and assessing whether objectives and key results (OKRs) are being met. Monitoring employee performance will also help you assess team members productivity.

4. Evaluate employee objectives  and progress

You can evaluate team member progress by setting up performance appraisals. Performance appraisals will allow you to give personal feedback on what each team member is doing well and where they can improve on their individual goals so they can better serve the company as a whole. This step in performance management is crucial because it emphasizes effective communication between management and the team. Team members may look forward to performance evaluations because feedback can provide a boost to team productivity.

5. Provide feedback and rewards

The last step in the MBO system is rewarding the team for their achievements. This increases team morale and keeps teammates motivated to work hard during the next MBO process. 

You can reward your team in both intrinsic and extrinsic ways. You can promote intrinsic motivation by challenging team members, recognizing their hard work, ensuring they feel a sense of belonging, and offering team-building activities. With these actions, you’ll help team members develop self-confidence and self-motivation.  

Extrinsic rewards may include praise, a paid bonus, a salary increase, promotions, extra responsibility in their current role, or paid time off. These rewards may be tangible or intangible, but they’ll likely incentivize team members to continue working toward their individual objectives and the company’s.

Management by objectives examples

An example of MBO in action would be a company that has a quarterly objective to earn 30% of overall revenue from their marketing efforts. To achieve this objective, they break it down into personal objectives for each team member. 

• For the digital marketers on the team, their personal objectives are to secure three new marketing clients for the quarter. 

• Managers monitor team member performance over the quarter to identify how each team member plans to achieve their personal goal and whether they’re making progress toward the goal. 

• If a team member reaches their goal at the end of the quarter, they are rewarded with a paid bonus.

Pros and cons of MBO

After Drucker first introduced MBO, it became a well-liked management technique in the 1960s and 1970s. However, widespread usage of the model has since decreased as companies tested out new styles of management. Some companies today still use MBO, but there are arguments for and against it. 

Advantages and benefits of MBO

Supporters of the MBO approach believe that using this form of management within a larger system creates a simpler management structure. Other benefits include:

• Increased team productivity: When team members have personal objectives, they have more clarity about why their work matters. As a result, their motivation and productivity increases. 

• Improved team communication: The MBO model can improve team communication and create a more open work environment because team members understand the objectives of the company and know that their personal goals align with those objectives. 

• Personalized team member objectives: Because the MBO system personalizes team member objectives and makes it a priority for team members to reach their highest potential, everyone in the company understands how their work makes an impact.

Disadvantages and limitations of MBO

Opponents of MBO believe that the model risks overlooking company ethics and values by placing so much focus on individual goals. Other drawbacks include:

• Prioritization of goal-setting over strategic planning: Prioritizing personal objectives for team members may come at the expense of long-term strategic planning. Companies that spend so much time setting goals may have less time to focus on company culture, operational issues, and other areas of involvement. 

• Increased strain on team members to meet goals: Because MBO focuses on the individual, team members may feel too much pressure to reach their goals. This can be a drawback of MBO because team members may become overworked in this type of work environment, which can lead to low retention and low morale. 

• Competition between team members: The extrinsic-focused reward system incorporated in MBO may promote competition between team members, which may get in the way of creating a healthy work environment. Healthy team dynamics in the workplace should include teamwork and supporting one another to reach personal and company goals. 

Comparing MBO to other goal-setting frameworks

Management by Objectives (MBO) is just one of several popular goal-setting frameworks used in modern business. Here's how it compares to other well-known approaches.

Management by objectives (MBO) vs. management by exception (MBE)

MBE focuses on identifying and addressing deviations from standard performance, while the MBO approach emphasizes setting and achieving specific objectives. MBE is more concerned with maintaining a status quo and intervening when issues arise, whereas MBO proactively sets goals to drive performance improvements.

MBO vs. SMART goals

SMART goals provide a structured approach to goal-setting, stipulating that objectives should be Specific, Measurable, Achievable, Relevant, and Time-bound. While MBO shares these principles, it is a more comprehensive framework that includes cascading goals, progress monitoring, and performance evaluation.

MBO vs. objectives and key results (OKR)

The OKR framework, popularized by Google, shares similarities with the MBO approach in terms of setting objectives and measuring progress. However, OKRs place greater emphasis on defining measurable key results and conducting regular check-ins to track performance against these metrics.

Choosing the right goal-setting framework

The choice of goal-setting framework depends on factors such as organizational culture, industry, and management style. Consider the following when selecting an approach:

• Alignment with company values and mission

• Level of employee involvement and autonomy

• Emphasis on individual vs. team performance

• Frequency of progress reviews and feedback

• Integration with performance appraisal and rewards systems

Regardless of the framework chosen, effective goal-setting involves clearly defining objectives, aligning them with company goals, and regularly monitoring progress to ensure success. By comparing and adapting elements from different approaches, organizations can develop a goal-setting system that best fits their unique needs and drives long-term achievement.

Implementing effective management by objectives

Implementing a successful MBO program requires careful planning and execution. Follow these steps to ensure an effective MBO process in your organization:

1. Define organizational objectives

Start by clarifying your company's overall strategic objectives. These should be specific, measurable, and aligned with your mission and vision. Involve key stakeholders to ensure buy-in and a shared understanding of these high-level goals.

2. Cascade objectives to departments and individuals

Break down organizational objectives into specific goals for each department and individual employee. Ensure that these goals are achievable, relevant to job roles, and contribute to the overarching company objectives. Engage employees in the goal-setting process to foster ownership and accountability.

3. Establish metrics and milestones

Determine how progress and success will be measured for each objective. Define clear metrics, KPIs, or OKRs that allow you to track performance. Set interim milestones to maintain momentum and enable course corrections if needed.

4. Implement regular progress reviews

Schedule frequent check-ins between managers and their team members to discuss progress, identify obstacles, and make necessary adjustments. These performance reviews should be supportive and focus on problem-solving rather than blame.

5. Evaluate employee performance and provide feedback

Conduct formal performance appraisals at regular intervals (e.g., quarterly or annually). Assess individual and team achievements against their defined objectives. Provide constructive feedback and recognize successes. Use the insights gained to inform future goal-setting cycles.

6. Align rewards and recognition with goal achievement

Tie rewards, bonuses, and promotions to the accomplishment of individual and team objectives. This helps reinforce the importance of the MBO process and motivates employees to stay engaged and driven.

7. Foster a supportive work environment

Encourage open communication, collaboration, and a growth mindset. Provide resources, training, and support to help employees reach their goals. Regularly assess and address any barriers to success, such as conflicting priorities or insufficient tools.

By following these steps and continually refining your MBO process, you can harness the power of this management technique to drive organizational success, boost employee performance, and enhance job satisfaction and retention.

Set goals and achieve company objectives with MBO

MBO is most effective when used as one part of a more comprehensive management plan. When team members have goals that connect to the company's mission, they’ll feel more motivated to collaborate. With goal-tracking software, you can help your team members stay on track with their goals and help them meet those goals in real time.

FAQ: Management by objectives (MBO)

What are the three types of MBO objectives?

The three types of MBO objectives are strategic objectives (long-term goals aligned with the company's mission), tactical objectives (short-term goals that support strategic objectives), and operational objectives (day-to-day goals that keep the business running smoothly). These objectives should be attainable and contribute to overall customer satisfaction.

Is the MBO process time-consuming?

While the initial setup of an MBO program may require some time investment, the long-term benefits often outweigh the initial effort. By clearly defining objectives and streamlining the goal-setting process, MBO can actually save time and increase efficiency in the long run.

What are the four steps of management by objectives?

The four steps of management by objectives are: setting objectives, developing action plans, monitoring progress, and evaluating performance. This objectives process helps align individual goals with organizational objectives, fostering employee engagement and improved decision-making.

How can human resources support the implementation of MBO?

Human resources can play a crucial role in implementing MBO by communicating the program's benefits, training managers on setting achievable goals, and aligning performance evaluations with MBO objectives. Additionally, HR can leverage social media and other internal communication channels to keep employees informed and engaged throughout the process.