The Complete Guide to Management By Objectives (MBO)

Are your employees actively working towards your company’s objectives — or simply focused on doing their own thing? One way to motivate employees to help your organisation achieve its goals is through management by objectives, or MBO. 

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What is management by objectives (MBO)?

Management by objectives (MBO) is a strategic management approach designed to align employees’ objectives with those of the organisation as a whole. Crucially, it’s all about working with each employee to set individual goals that are tied to the company’s overall objectives. Another key principle of MBO is continuous feedback. Employees benefit from regular check-ins with their manager, where they can report on progress and access support. 

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The link between MBO and compensation 

MBO is often deployed as part of an organisation’s variable compensation strategy. That means that employees receive additional pay — usually in the form of a bonus — for meeting all of their objectives. This is an effective way of driving organisational performance since it ties employee motivations to the company’s goals. 

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The MBO process in 6 key steps 

MBO is about taking wide-reaching business goals and cascading them down through an organisation. This ensures that every department, team and individual employee is working towards the overall success of the company. Read on to learn how that process works in practice.

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1. Determine organisational objectives

The first step is to define your organisation’s overall objectives, which should be based on your mission and vision. Most companies are working towards several main objectives at any one time. Organisational goals might include: 

• Customer-centric goals
• Financial goals
• Internal goals
• Regulatory goals

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2. Transpose these at the department and team level 

These high-level goals will then need to be cascaded down to the department and team level. Each department will then set its own goals, contributing to the company’s overall objectives. Keep in mind that not every goal will be relevant to every department.

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3. Work with employees to set individual goals

The next step is for managers to work with each employee to set individual goals that are linked to those defined at the department and organisation levels. Including employees in the goal-setting process helps build a sense of accountability and makes them more likely to achieve their objectives. 

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4. Establish metrics and milestones for each objective 

Every organisation defines success differently — and determining what it will look like for you is a key part of the MBO process. You should work with employees to define the key metrics or KPIs that you’ll use to track progress and determine success. It’s also a good idea to set incremental goals or milestones that will help keep employees on track and motivate them as they work towards their overall objectives. 

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5. Monitor progress and provide feedback and support 

As employees work towards their goals, make sure they’re checking in regularly with their managers. This allows managers and employees to discuss progress, identify roadblocks and even adjust goals if needed. With the right support and resources, every employee should be able to achieve the goals they have set for themselves.

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6. Evaluate performance and reward achievements 

Formal performance appraisals are also a crucial element of MBO. Depending on your organisation, these might be quarterly, biannual or annual. They’re an opportunity to measure employees’ work against the goals and KPIs set at the beginning of the process and reward those who have succeeded. It’s also an important moment to provide constructive feedback to anyone who has not quite met their objectives. 

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MBO example 

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Let’s look at a quick example to show you how the above steps work in practice: 

• Step #1: An organisation sets a goal of improving customer satisfaction by 10% by the end of the year. 

• Step #2: This is cascaded down to all departments, which all set their own goals. The head of the customer service department sets a goal of reducing overall ticket resolution time by 25%

• Step #3: A customer service representative works with their manager to set a goal of increasing the number of support tickets they close within 24 hours. 

• Step #4: Between them, the manager and the employer set a KPI of closing at least 90% of support tickets within 24 hours. If the employee achieves this, they will have met their objective and will be eligible for a bonus.

• Step #5: During a check-in, the employee reports that changes to the company’s product mean they are experiencing a higher number of complex support cases than usual. The manager therefore decides to adjust the goal to 75% of tickets closed within 24 hours. They also show the employee where they can access additional training to help them resolve complex problems more quickly. 

• Step #6: At the end of the year, the employee has achieved their adjusted goal. They therefore receive a cash bonus, in line with the company’s variable compensation policy. 

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Pros and cons of MBO 

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While MBO can be a valuable approach for some organisations, it may not work as well for others. Here are some of the pros and cons of this strategy that employers should be aware of.

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The advantages of management by objectives 

Management by objectives has been around for a long time — and for good reason. Here are some of the advantages of the MBO framework: 

• Increases productivity: MBO incentivises employees to work towards the company’s objectives. This can lead to a significant increase in productivity and performance across the organisation. 

• Aligns motivations: MBO ensures employees’ motivations are in line with the company’s overall goals. Rather than just encouraging hard work in general, MBO enables employers to laser-focus on achievements that will most benefit the company. 

• Fosters accountability: A key principle of MBO is that employees are involved in the goal-setting process. This helps build a sense of ownership and accountability and can make them more likely to meet their objectives.

• Provides meaning: MBO helps employees understand how their role contributes to the organisation’s overall success. This shows employees the importance of their work, potentially improving motivation. 

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The disadvantages of management by objectives 

Of course, MBO also has some limitations. Here are some of the biggest downsides of this approach: 

• Over-focus on goals: One criticism of MBO is that it focuses too much on goal-setting and achievement and ignores other aspects of a company, such as corporate culture, employee engagement and CSR. 

• Increases stress: MBO can put a lot of pressure on employees. While this can be motivating for some people, others find it stressful and unhelpful. 

• Can lead to misaligned incentives: Under the MBO model, employees may be encouraged to take shortcuts or prioritise quantity over quality. It may also lead employees to focus on short-term wins at the expense of the company’s long-term well-being. 

• Creates unhealthy competition: MBO can create an overly competitive culture as employees work against each other to secure bonuses and raises. This can harm the company’s overall performance as teamwork and collaboration go out the window.

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How to do MBO the right way: best practices to follow

When it’s handled correctly, MBO can have a transformative effect on an organisation. But if you’re not careful, it can lead to problems with culture, engagement and motivation. Here are a few best practices to follow to make MBO work for your organisation. 

Use SMART goals

Carefully considering the goals you set for each employee is crucial to the success of your MBO strategy. After all, if goals are not realistic or achievable, employees will soon become disheartened — which can have a knock-on effect on your company culture. For best results, use SMART goals. These are goals that are specific, measurable, achievable, relevant and time-bound. 

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Involve employees in the process

As we’ve mentioned, involving employees in the goal-setting process is a key part of MBO. That’s because employees are much more likely to put their full effort into achieving a goal if they’ve played a part in setting it. Also, employees understand their work better than anyone else. That means they know what’s realistic and achievable. 

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Adjust goals when needed

Another core element of MBO is the ability to adjust goals when needed. While this shouldn’t be done all the time, managers shouldn’t hesitate to change a goal if it becomes clear it’s no longer achievable — especially if this is through no fault of the employee. Above all, MBO should be about supporting employees to succeed — not setting them up for failure.

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Emphasise teamwork

When it’s not handled correctly, MBO can have a disastrous impact on company culture. That’s why it’s crucial that managers eemphasise the importance of teamwork and collaboration in their communication with employees. After all, while everyone may be working towards their own goals, these are all ultimately tied to the company’s overall objectives. That means employees should be working together, not competing with each other. 

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The importance of effectively evaluating performance in 2025

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Management by objectives is a system that rewards employees for achieving specific, pre-determined goals. Why does that matter? Well, if you haven’t heard, an important piece of pay transparency legislation is on the horizon in Europe — and it will require employers to justify and document their reasons for paying people a particular amount of money. 

Once the new rules come in, employers will need ways to show that their pay decisions have been made according to objective, fair and gender-neutral criteria — and that bias and discrimination don’t play a role. Strategies that tie employee remuneration directly to concrete, measurable factors could help companies comply with the directive and avoid putting their business at risk. 

Want to find out more? Learn about the EU Pay Transparency Directive and its impact on compensation practices in Europe here. 

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