Dr. Sharon Gotteiner, CPA
Management by Objectives (MBO) has become a commonly used term, with respect to managers’ targets, performance, and compensation. But it may not be effective in channeling employees’ efforts to improved profitability. Too many studies have found that the implementation of MBO does improve employees’ productivity, but that improved productivity is not converted into a better P&L bottom line. Here is what you can do about it.
Not too long ago, I published a new, hopefully, improved formula for MBO implementation, called the OPTIMAL MBO©. It was published in Europe in 2016 and seems to gain attention in Europe and the US since then (get the full text here: Gotteiner, 2016).
The OPTIMAL MBO© method integrates components of the original MBO method (Drucker, 1956) with additional components imported from the field of Corporate Turnaround. Such an integration generates a list of components that aligns personal evaluation processes with a firm’s top-level objectives, such as operational, financial, or growth-related. What are the initials of those methodological components? That’s right: OPTIMAL. So, here is the list of components that you may want to consider when implementing Management by Objectives:
O = Objectives, Outside-in. Align objectives with the mission statement. Keep objectives client or market-oriented.
P = Profitability (budget). Identify the financial items (P&L, balance sheet) reflecting or serving such objectives.
T = Target & goal setting. Set targets (measurable) and goals (achieved / not achieved) affecting the financial items that reflect or serve such objectives.
I = Incentives & Influence. Make sure staff members can influence the achievement of targets and goals assigned to them. Pay incentives on a monthly or quarterly basis, as much as possible, in relation to the achievement of such targets and goals.
M = Measurement. Maintain objective measurements of the actual performance.
A = Agreement, Accountability, Appraisal, Appreciation. Attain Employees’ commitment to their targets and goals, maintain periodical appraisals, respond to the levels of actual performance.
L = Leadership Support. Following all the above should win executive support. Executives should demonstrate such support.
The OPTIMAL MBO© formula may be the latest progress in MBO research, and empirical findings regarding its effectiveness may accumulate over time. Meanwhile, we will be glad to support any organization aiming at improving its MBO implementation, and aligning it with its top-level, operational, financial and growth-related objectives.
The opinions expressed through this website do not suit all business circumstances.
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