Hiring Glossary

Management By Objectives (MBO)

MBO, or Management by Objectives, is a strategic management technique in which specific goals are set collaboratively by both management and employees to ensure that everyone works towards common objectives. These objectives are aligned with the organization's overall goals and are measurable and planned around a timeline, making MBO a key performance management tool.

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Milani Notshe

Research Specialist

Last Updated

February 14, 2025

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what Management By Objectives (MBO)

As a business owner or human resources manager, you may come across Management By Objectives (MBO) in the context of performance management. MBO is a strategic approach where managers and employees collaboratively set specific, measurable goals that align individual objectives with the organization's overall aims. This method enhances clarity, accountability, and motivation, leading to improved performance and organizational success.

For example, a sales manager and their team might set a goal to increase client acquisition by 15% over the next quarter. By defining this objective together, the team better understands the target, the timeline, and their roles in achieving it.

What Is The Difference Between MBO And MBE (Management by Exception)? 

The primary difference between MBO and MBE lies in their approach to management and decision-making. MBO is a proactive approach where managers and employees set specific goals and regularly monitor progress to stay aligned with organizational objectives. In contrast, MBE is reactive, where managers only intervene when performance does not meet set standards or other issues arise. MBO involves continuous involvement, while MBE focuses on addressing exceptions to maintain efficiency.

What Are The Steps Of MBO? 

MBO works by breaking down broader organizational goals into individual objectives. There are five steps to follow to ensure that organizational and individual goals are aligned and achieved. Here are the key steps involved:

  1. Define Organizational Objectives: Set clear, measurable company goals. These objectives should be informed by the organization’s overall mission and vision. Employers can use the acronym SMART (specific, measurable, achievable, realistic, and time-bound) to guide the development of these objectives. For example, the customer service department might set objectives related to improving customer satisfaction ratings within a particular time frame.
  2. Set Individual Objectives: Align employees' goals with organizational objectives. This step should make employees aware of what is expected of them and how their performance will be evaluated. 
  3. Monitor Progress: Continuous monitoring of progress is a critical part of MBO. Managers regularly check in with employees to assess their performance, offer feedback, and make adjustments if necessary. This ongoing review helps identify any challenges earlier and ensures that objectives remain on track.
  4. Evaluate Performance: At the end of the review period, employee performance is evaluated against the set objectives during a performance appraisal. This evaluation is based on the results achieved and how well the employee met their targets. Feedback is provided to help employees understand their strengths and areas for improvement.
  5. Reward and Feedback: Based on the performance evaluation, employees may be rewarded for achieving their objectives. Rewards could include bonuses, promotions, or other incentives. Constructive feedback is also provided to help employees improve and set new goals for the next MBO cycle.

The MBO process ensures that short-term objectives contribute to the long-term success and performance of the organization. 

The Pros And Cons Of MBO 

The MBO management technique can offer many benefits such as clarity and goal alignment. However, it can also be challenging due to its time-intensive nature and potential pressure on employees.

The Pros Of MBO The Cons Of MBO
Employees have specific, measurable goals that align with the company's organizational objectives. The process of setting and reviewing objectives can be time-consuming and require constant updates.
MBO allows managers to monitor progress and provide timely feedback to employees. MBO can sometimes prioritize short-term goals over long-term strategic thinking.
Employees are more motivated when they understand how their work contributes to the company’s success. Focusing too much on measurable or quantitative goals can neglect qualitative aspects of performance.
The process improves communication by encouraging open dialogue between employees and management regarding goal setting and progress. Employees might feel increased pressure to meet objectives, leading to increased stress.

The Importance of MBO

MBO provides a structured framework for aligning individual objectives with the company's overall mission. This approach helps improve the performance of an organization by ensuring that everyone works toward common, measurable goals. Additionally, it allows employees to understand their contribution to the organization and track their progress in achieving these goals.

MBO FAQs

What Is The Difference Between MBO And OKRs?

MBO focuses on longer-term, measurable objectives that align with organizational goals, while OKRs emphasize stretch goals and shorter, more frequent cycles of assessment.

Who Introduced MBO?

MBO was introduced by Peter Drucker in his 1954 book The Practice of Management, where he outlined how goal-setting can drive performance.

What Is The Meaning Of MBO In Sales?

MBO can be applied to sales teams, for example, a sales team may set specific sales targets for each quarter, ensuring those numbers contribute to the company's overall revenue goals.

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ABOUT THE AUTHOR

Milani Notshe

Milani is a seasoned research and content specialist at Playroll, a leading Employer Of Record (EOR) provider. Backed by a strong background in Politics, Philosophy and Economics, she specializes in identifying emerging compliance and global HR trends to keep employers up to date on the global employment landscape.

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