Management by Objectives (MBO)

MBO: A system in which specific performance objectives are jointly determined by subordinates and their supervisors, progress toward objectives is periodically reviewed and rewards are allocated on the basis of that progress.

Many organizations today are helping their employees set performance objectives in an effort to achieve organizational goals. Through a process called MBO, subordinates and their superiors jointly determine performance objectives; periodically review progress toward objectives, and allocate rewards on the basis of that progress. Instead of using goals to control, MBO uses them to motivate.

What is MBO?

Management by objectives is not new. The concept goes back almost 50 years. Its appeal lies in the emphasis on converting overall into specific objectives for organizational units and individual members.

MBO makes objectives operational by a process in which they cascade down through the organization. As depicted the organization’s overall objectives are translated into specific objectives for each succeeding level divisional, departmental, individual in the organization. Because lower unit managers participate in setting their own goals, MBO works from the bottom up as well as from the top down. The result is a hierarchy that links objectives at one level to those at the other levels. For the individual employee, MBO provides specific contribution to make to his or her unit’s performance. If all the individuals achieve their goals, then the unit’s goals will be attained. Subsequently, the organization’s overall objectives will become a reality.

What are common elements in an MBO Program?

Four ingredients are common to MBO programs: goal specificity, participative decision making, an explicit time period, and performance feedback. Let’s briefly look at each of these.

The objectives in MBO should be concise statements of expected accomplishments. It is not adequate, for example merely to state a desire to cut costs, improve service or increase quality. Such desires need to be converted into tangible objectives that can be measured an evaluated for instance to cut departmental costs by 8 percent to improve service by ensuring that all insurance claims processed within 72 hours of receipt, or to increase quality by keeping returns to less than 0.05 percent of sales.

In MBO, the objectives are not unilaterally set by the boss and assigned to employees, as is characteristic of traditional objective setting. Rather, MBO replaces these imposed goals with participatively determined goals. The manager and employee jointly choose the goals and agree on how they will be achieved. Each objective also has a concise time period in which it is to be completed. Typically the time period is three months, six months, or a year.

The final ingredients in an MBO program is continuous feedback on performance and goals that allows individuals to monitor and correct heir own actions. This continuous feedback is supplemented by periodic formal appraisal meetings in which superiors and subordinates can review progress toward goals, which lead to further feedback.

Details on a management classic:

The case for the value of setting objectives in organization s was proposed 35 years ago by Edwin A Locke. Through his goal setting theory, Locke claimed that setting specific employee goals increases performance. He suggested that difficult goals, when accepted by the employee, resulted in even higher performance than easy goals do. And, finally Locke suggested that employee performance led to higher performance than when feedback was lacking. Research in subsequent years has supported Locke’s claims.

Goal setting theory recognizes that specific hard goals produce a higher level of output than does a generalized goal of do your best. The specificity of the goal itself seems to act as an internal stimulus and encourages employees to strive to meet the goal. If factors such as ability and acceptance of the goals were held constant, the evidence also demonstrates that the more difficult the goal, the higher the level of performance. Of course it’s logical to assume that easier goals are more likely to be accepted. But once an employee accepts a hard task he or she will exert a higher level of effort until the goal is achieved, lowered, or abandoned. Finally people will do better when they get feedback on how well they are progressing toward their goals because feedback helps to identify discrepancies between what they have done and what they want to do.