Pay-for-Performance

Management by Objectives

Management by objectives (MBO) is a management practice where goals and objectives are documented with accomplishment within a timeframe. MBO is not commonly used to solely manage employee performance.

Within an organization, senior executives are usually the individuals who identify broad organizational goals and objectives. The goals and objectives are then rolled-out in a top-down approach. Typically, management and subordinates discuss, identify, and document specific goals and objectives within an agreed-upon timeframe to contribute to the top organizational goals agreed to by senior leadership.

Goals should always be set using the SMART objective standards:

• Specific
• Measurable
• Attainable
• Realistic
• Time-Bound

Once the goals are set, ongoing monitoring of progress is important to ensure attainment of the goals and objectives within the performance period. Once the performance period has ended, the achievement of agreed upon objectives leading to accomplishment of goals is evaluated through a documented program with results being quantified in terms of a percentage. The overall percent achievement is typically used to recognize and reward eligible employees as part of the short-term incentive program.

In most cases, goals and objectives are commonly used to manage achievements under an Annual Incentive Plan, which is a short-term incentive plan. The percent achievements within an MBO program are typically one of the criteria for determining payouts under a short- or long-term incentive plan. In these situations, a separate performance management program typically exists, and a merit increase program exists for recognizing performance through the base pay program.

So why wouldn’t an MBO plan work?

The following issues may keep an MBO plan from working. These include:

• employee lack of involvement in setting objectives
• distrust between manager and employee
• lack of feedback to the employee
• the economy or state of the business may be too dynamic to set objectives and have them mean anything in a month, much less six months or a year

MBO also assumes that the outcomes of work are the only important variables to consider in defining good performance. Yet often, how the work is done is as important as what is accomplished. The 'how' variable is hard to factor into MBO programs.

MBO conclusions

MBO should be considered for management of a bonus or short- or long-term incentive plan, the topic of DLC Course 75: Creating a Variable Pay Plan.