Management by Objective – A Performance Management System

Cite this article as:"Management by Objective – A Performance Management System," in The Business Professor, updated April 11, 2020, last accessed October 25, 2020,

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Management By Objective as a Performance Management System

Peter Drucker’s management by objectives (MBO) approach is one of the first systematic approaches addressing management goals and objectives. As such, MBO can be viewed as a performance management system, as it provides an approach for management to identify achievable goals and enhance performance by aligning employee objectives with those goals.

This approach calls for the identification of goals developed from the corporate strategy, crafting specific employee objectives in collaboration with employees, allowing the employee a level of autonomy in developing a plan of action and pursuing these objectives, and clear communication of expectations for completion, providing monitoring and feedback in the process, and making modifications to goals as necessary.

The most salient attribute of MBO is that it requires clear communication and understanding of organizational goals and objectives and the roles and responsibility of individuals in achieving those objectives.

After identifying organizational-level goals, managers will create written goals and objectives for each level of the organization. Managers then collaborate with employees to establish specific responsibilities and individual objectives. The result is increased employee focus on specific objectives at hand.

The criteria for the defined objectives include:

  • Ordered according to the level of importance
  • Quantitatively defined
  • Realistic or capable of being achieved
  • In accordance with organizational policies
  • Compatible with other objectives

Notably, these criteria have given way to the use of Specific, Measurable, Achievable, Realistic, and Timely (SMART) goals.

Finally, managers will establish a system for monitoring employee progress and the systematic review of that progress with the employee allows managers to measure employee efficiency and effectiveness while making any necessary modifications to the established objectives.

The effect of this system is seen as improving organizational performance through:

  • Alignment of effort with organizational strategies
  • Increased employee focus
  • Increased employee motivation, empowerment, and job satisfaction

The difficulty with administering this type of system is that rewards systems used to incentivize completion of individual objectives are out of sync with overall organizational strategy.

The MBO framework has become less of a holistic performance management system and more of a tool that is actively integrated into other approaches to performance management.

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