Loading the player...

What is 'Management By Objectives - MBO'

Management by objectives (MBO) is a management model that aims to improve performance of an organization by clearly defining objectives that are agreed to by both management and employees. According to the theory, having a say in goal setting and action plans should ensure better participation and commitment among employees, as well as alignment of objectives across the organization. The term was first outlined by management guru Peter Drucker in 1954 in his book "The Practice of Management."

BREAKING DOWN 'Management By Objectives - MBO'

A key tenet of management by objectives is the establishment of a management information system to measure actual performance and achievements against the defined objectives. Practitioners claim that the major benefits of MBO are that it improves employee motivation and commitment, and ensures better communication between management and employees. However, an oft-cited weakness is that MBO unduly emphasizes the setting of goals to attain objectives, rather than working on a systematic plan to do so.

Basic Principles

Peter Drucker set forth several principles. Objectives are determined with the employees and are challenging but achievable. There is daily feedback, and the focus is on rewards rather than punishment. Personal growth and development are emphasized, rather than negativity for failing to reach the objectives.

Peter Drucker believed MBO was not a cure-all, but a tool to be utilized. It gives organizations a process, with many practitioners claiming the success of MBO is dependent on the support from top management, clearly outlined objectives, and trained managers who can implement it.

Putting it Into Practice

MBO calls for five steps that organizations should use to put the management technique into practice. The first step is to either determine or revise organizational objectives for the entire company. This broad overview should be derived from the firm's mission and vision. The next step is translating the organizational objectives to employees. Drucker used the acronym SMART (Specific, Measurable, Acceptable, Realistic, Time-bound) to express the concept.

Step three is stimulating the participation of employees in setting objectives. After the organization's objected are shared with employees, from the top to the bottom, employees should be encouraged to help set their own objectives to achieve these goals. This gives employees greater motivation since they have greater empowerment. The next to last step is to monitor the progress. In step 2, a key component of the objectives was that they are measurable in order for employees and managers to determine how well these were met. Lastly, progress is evaluated and rewarded. This step includes honest feedback on what went well and what did not.

RELATED TERMS
  1. Management Buyout - MBO

    A transaction where a company’s management team purchases the ...
  2. Performance Management

    The management of employees, departments, and organizations to ...
  3. Strategic Management

    The management of an organization’s resources in order to achieve ...
  4. Performance Appraisal

    An annual review of an employee’s overall contributions ...
  5. Human Capital

    A measure of the economic value of an employee's skill set. This ...
  6. Key Employee

    An employee with a major ownership and/or decision-making role ...
Related Articles
  1. Small Business

    Understanding Management by Objectives

    Management by objectives is a process in which a manager and an employee agree on specific performance goals and then develop a plan to reach those goals.
  2. Investing

    What is a Management Buyout?

    A management buyout, or MBO, is a transaction where a company's management team purchases the assets and operations of the business they manage.
  3. Small Business

    How to Conduct an Effective Performance Review

    A proper performance review can be a very useful tool for both managers and employees.
  4. Small Business

    5 Ways to Create a Bonus Structure for Your Small Business

    Understand what goes into a good small business bonus structure. Learn about how a small business can create a bonus structure that attracts employees.
  5. Financial Advisor

    Asset Manager Ethics: Independence and Objectivity

    The best practices in maintaining independence and objectivity should be adopted by firms to protect investment professionals from pressure both from within and outside the firm.
  6. Managing Wealth

    Three Perks Business Should Give Their Employees

    Firms that treat their employees well have a competitive advantage over their rivals. Here are three important perks to give your employees.
  7. Managing Wealth

    Top 5 Ways to Retain Your Best Employees

    You need to think beyond salary to make the most talented people want to stay on for the long term.
  8. Managing Wealth

    5 Low-Cost Perks for Small Business Employees

    Money isn’t the only way to motivate employees. Here are some savvy strategies even the smallest business can use.
  9. Financial Advisor

    Life Insurance Plans to Help Your Small Business Retain Employees

    How to use and design cash value life insurance plans as an incentive to help attract and retain key employees.
RELATED FAQS
  1. What does a merger or acquisition mean for the target company's employees?

    Learn about the likely impacts of a mergers & acquisition deal on the target company's employees, their benefits and adjusting ... Read Answer >>
  2. Can LLCs have employees?

    Discover how limited liability corporations (LLC) can have an unlimited number of employees and the legal steps required ... Read Answer >>
  3. How can key performance metrics (KPIs) help evaluate employees?

    Discover how key performance indicators can be used to evaluate employee performance around goals which support organizational ... Read Answer >>
  4. Is an employee eligible for an SEP if the plan has already been set up for other ...

    It depends. The employee should meet not only the service requirements, but the age and compensation requirements as well. ... Read Answer >>
  5. Does technology follow the law of diminishing marginal returns?

    Learn how workers in the technology industry are affected by the law of diminishing marginal returns, and note the ways that ... Read Answer >>
  6. What is the difference between portfolio management and financial planning?

    Understand the difference between financial planning and portfolio management, and learn which financial professionals can ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center