In a world where abbreviations can have multiple meanings, the term “MBO” can be confusing. If you are thinking about “management buyout,” I would stop you right there; that is not the topic of our post today. But don’t worry, we will devote an entire article to that concept in the near future.
Today, let’s talk about “Management by Objectives” or “Management by Goals.” And, if you are familiar with OKRs (Objectives and Key Results), you may find some intriguing similarities between the two, although they also have their own peculiar differences — but that will be the subject of another exciting post!
Are you curious about how MBO can transform business management? Do you want to understand how goals are set, who decides KPIs, and how results-based pay works? How about delving into how individual goals are determined or discovering the benefits of an MBO system?
You may be asking yourself, “Who is eligible to receive MBO? When and how is it disbursed? And, most importantly, how is it taxed?”
If you are looking for answers to these questions, you are in the right place. In this article, I have distilled the most important concepts on all these aspects of MBO, and I guarantee that as you continue reading, you will discover valuable information that may enhance your view of management by objectives.
What is meant by MBO (management by objectives)?
Management by Objectives (MBO) is a business management methodology that focuses on the importance of objectives. But what exactly does it mean and where did it originate?
MBO was theorized in 1954 by noted management thinker Peter Drucker in his book “The Practice of Management.” This approach is based on the idea of setting clear and measurable goals at various levels of the organization, from corporate strategy to individual employee goals.
The heart of the MBO lies in its ability to link individual goals to corporate goals. Starting with the organization’s strategic goals, more operational objectives are set for each business area. These, in turn, are declined into specific action plans and, finally, into individual goals. This process ensures that every member of the organization is aligned and oriented toward the same business goals.
To illustrate further, let us imagine a company whose strategic goal is to expand into a new market. The sales area might have the goal of acquiring a certain number of new customers in that market, while the marketing area might have the goal of increasing brand awareness in the same region. An individual salesperson might have the individual goal of closing a certain number of contracts or achieving a certain volume of sales.
What makes the MBO particularly effective is its emphasis on planning, training and evaluation. Initially, goals are clearly defined and communicated to all levels of the organization. Along the way, periodic reviews are conducted to ensure that each individual is on the right track to achieve the goals set. Finally, there is a time of evaluation where performance is analyzed and, if achieved, goals can be rewarded, often with financial incentives.
How does the goal-setting process work in the MBO?
The goal-setting process in the MBO takes place in several stages:
- Defining the organization’s goals
This stage is crucial to the success of any business. Goal setting must involve all managers in the organization. The goals set at this stage are provisional and are based on the interpretation and analysis of what the company can and should achieve in a given period of time. - Defining employee goals
After clarifying company goals, managers work with employees to define each person’s personal goals. This stage includes a one-on-one discussion, during which employees communicate their goals, the expected time to achieve them, and the resources needed. - Continuous monitoring of performance and progress
This step is essential to ensure that goals are being met. Monitoring allows employees’ performance to be evaluated and corrections to be made if necessary. - Performance appraisal
In the MBO, performance appraisal is carried out with the participation of managers involved in the process. - Provide feedback
This is the last step in the process and is concerned with communicating results and goals achieved. Feedback is essential to enable employees to make corrections to their actions.
Organizational structure and MBO
In order to effectively adopt MBO, it is essential to have a well-defined organizational structure. The key to successful MBO lies in the clear definition of goals and continuous interaction between managers and employees. Therefore, the company must have a structure that fosters communication and collaboration among the various hierarchical levels. In addition, it is critical that there be a commitment from management to support and promote the MBO approach throughout the organization.
What should the goal in Management by Objectives (MBO) look like?
Goals in the MBO are not simply desires or aspirations, but rather represent clear, measurable and achievable goals that an organization or individual sets out to achieve within a given period of time. Here are some key characteristics that an MBO goal should possess:
- Specific
An MBO goal should be well defined and clear. It should leave no room for vague interpretation. For example, instead of “increase sales,” a specific goal could be “increase sales by 10 percent in the next quarter.” - Measurable
It must be possible to quantify or at least evaluate the goal. This means that you should be able to measure progress and determine when the goal has been achieved. - Achievable
While goals should be challenging, they should also be realistic and achievable. A goal that is beyond reach will demote rather than incentivize. - Relevant
The goal should be in line with the mission and vision of the organization and should have a significant impact. - Timed
Each goal should have a clear deadline by which it should be achieved.
Target identification process
The goal-setting process begins with an assessment of the organization’s needs and priorities. This may include analysis of strengths and weaknesses, opportunities and threats (SWOT analysis). Once the key areas to focus on have been identified, managers, in collaboration with their teams, define specific objectives. These goals are then communicated to all levels of the organization, ensuring that everyone is aligned and working toward the same goals.
Difference with an OKR lens
While MBO goals are often tied to specific and measurable outcomes, OKRs (Objectives and Key Results) tend to be more flexible and adaptable. OKRs are often used to pursue ambitious, long-term goals, while MBOs tend to be more short-term and tied to specific business outcomes. In addition, while MBOs can be tied to incentives and bonuses, OKRs are generally separate from compensation and focus more on growth and learning. Both methodologies have their strengths and can be used in complementary ways within an organization.
Who sets the KPIs?
KPIs, or Key Performance Indicators, are metrics used to assess the effectiveness with which an organization achieves key objectives. They are critical in the MBO process, as they provide a tangible measure of progress toward established goals.
- Defining KPIs: In general, KPIs are defined by senior managers or leaders in the organization. These leaders have an overview of business priorities and are able to identify which metrics are most relevant to the success of the organization.
- Team involvement: While the initial definition of KPIs may come from management, it is essential to involve teams and employees in the process. This is because they are the ones in the field who best understand the day-to-day challenges and can provide valuable input on which KPIs are realistic and how they can be measured effectively.
- Target setting: Once KPIs have been defined, targets or thresholds need to be set to be met. These targets should be challenging but achievable and based on historical data, industry benchmarks, and strategic goals of the organization.
Parallel between KPIs in the MBO and Key Results in the OKRs.
Both, the KPIs in the MBO and the Key Results in the OKRs, serve as measurement metrics to assess progress toward specific goals. However, their nature, application and focus have key differences:
- Nature and Application:
- KPI (MBO): KPIs, or Key Performance Indicators, are metrics established to monitor and evaluate the effectiveness of a specific process or activity. They are often linked to processes and provide a detailed view of the current state of the business.
- Key Results (OKR): Key Results are measurable outcomes that indicate whether a goal (Objective) has been achieved. They are formulated to be understandable to the entire organization and reflect progress toward a strategic goal.
- Focus:
- KPI (MBO): KPIs tend to focus on operational and performance metrics, often without a defined deadline.
- Key Results (OKR): Key Results are focused on specific, tangible results to be achieved within a defined period of time.
- Relationship to Objectives:
- KPI (MBO): KPIs are often used as benchmarks to evaluate performance against standards or expectations.
- Key Results (OKR): Key Results are directly linked to goals and represent concrete steps toward achieving those goals.
KPIs in the MBO provide a continuous view of performance while Key Results in OKRs offer a clear measure of progress toward specific goals. Both are essential tools, but with different applications.
What are individual goals?
Individual goals in the MBO represent specific targets assigned to individual employees or managers within an organization. These goals are usually derived from overall corporate goals and are tailored to each individual’s role, skills and responsibilities.
Importance of individual goals in MBO: Individual goals are crucial in MBO for several reasons:
- Strategic Alignment: They ensure that each team member contributes directly to the achievement of business goals.
- Motivation: Provide clear direction to employees, increasing their motivation and commitment.
- Performance appraisal: Serve as the basis for evaluating individual performance and determining any incentives or bonuses.
Parallel with OKRs
While MBO tends to focus on individual goals, OKRs emphasize team or departmental goals. This is because:
- Collaboration: OKRs promote collaboration among team members, encouraging shared responsibility and collective problem solving.
- Flexibility: Team goals allow for greater flexibility, enabling teams to adapt quickly to changes.
- Reduced internal competition: Focusing on team goals rather than individual goals reduces the risk of internal competition and promotes a more collaborative work environment.
Why avoid individual goals in OKRs
Assigning individual goals in OKRs can lead to an isolated mindset, where each individual cares only about his or her own progress rather than the overall success of the team or organization. In addition, individual goals can create nonproductive competition among team members and reduce collaboration. Focusing on team goals promotes a more unified and collaborative approach to goal achievement.
Individual goals are central to MBO, while OKRs tend to favor a team approach, recognizing the benefits of collaboration and collective alignment toward common goals.
How does the performance bonus work?
Under Management by Objectives (MBO), the performance bonus represents an economic or noneconomic incentive offered to employees or teams based on meeting or exceeding predetermined goals. This reward system is designed to motivate and recognize individual or team efforts that directly contribute to the success of the organization.
Characteristics of the performance bonus in the MBO
- Measurable: The award is closely linked to the achievement of specific, measurable goals.
- Motivational: Serves as an incentive for employees to give their best and focus on company goals.
- Flexible: Can vary according to the level of goal achievement, with higher rewards for exceptional results.
Why avoid economic rewards based on OKRs
While MBO often links rewards to goal achievement, linking economic rewards to OKR achievement may not be the optimal choice for several reasons:
- Focus on Growth: OKRs are designed to promote growth and learning. Associating economic rewards can shift the focus from pursuing ambitious goals to achieving sure results to secure the reward.
- Risk of Competition: Economic rewards may encourage a competitive rather than collaborative mindset, reducing the sharing of information and resources among teams.
- Limitation of Innovation: If employees are too focused on achieving OKRs to earn an award, they may avoid taking risks or exploring innovative new ideas.
- Complex Measurement: OKRs are often long-term and ambitious goals, making it difficult to establish fair rewards based on their achievement.
While the performance bonus in the MBO is a powerful motivational tool, associating economic rewards with the achievement of OKRs can distort the purpose of OKRs and limit their potential as a tool for growth and innovation.
Who gets MBO, how much is it and how is it taxed?
MBO is predominantly for executives and middle managers, representing a reward system based on the achievement of specific goals. These professionals, by virtue of their strategic and decision-making positions within companies, are often incentivized through the MBO to align them with company goals and motivate them to achieve predetermined targets.
Taxation and Limits
If the performance bonus under the MBO does not exceed 3,000 euros annually and the previous year’s RAL does not exceed 80,000 euros, the taxation for 2023 is 5%. However, from 2024, there is a return to subsidized taxation of 10%. These incentives are linked to improvements in areas such as productivity, quality and innovation, determined through collective agreements.
The Corporate Welfare option that reduces the impact of taxes
An alternative to the traditional MBO is corporate welfare, specifically “pure or premium welfare.” This system allows executives and managers to convert part or all of their bonus into welfare services, benefiting from a full bonus tax credit and offering benefits for both the employee and the company.
