What is management by objectives (MBO)?

The idiom “It takes a village” refers to the idea that success stems from collaboration. As a project manager, you experience this first-hand. You rely on your village—or your team—to complete projects. Companies also rely on the collective whole 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. First introduced by Peter Drucker in his 1954 book “The Practice of Management,” the MBO model also places focus on monitoring team member performance using reporting tools and performance reviews. 

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 process for MBO

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 in this stage.    

2. Translate objectives into goals

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

As your team members work toward their specific objectives, you’ll need to monitor their performance. You can monitor the performance 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 team member performance will also help you assess team member productivity.

4. Evaluate 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 in team productivity.

5. Reward accomplishments

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 with 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. 

The pros and cons of MBO

MBO became a popular management strategy in the 1960s and 1970s after it was first introduced by Drucker. 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.  

Pros of MBO

Supporters of MBO 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.

Cons 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. 

Management by objectives example

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.

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 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.