Search This Blog

Monday, February 20, 2012

An Analysis of Management By Objectives (MBO)

By Aaron S. Robertson

The following is a paper submitted by the author on February 8, 2012 for a class assignment. The author is currently pursuing a master of science in management degree from Cardinal Stritch University in Milwaukee.


This student, relying on a unique combination of academic research, personal work experience, and anecdotal evidence, demonstrates why the performance management system known as Management By Objectives (MBO), as it currently stands, is not the best indicator of an employee’s worth and potential to an organization, and has the ability to severely harm customer service.


In the world of business, many kinds of systems exist that are used to track and evaluate an employee’s performance and contributions to the organization. Depending on what type of business or industry is being discussed, some systems tend to be preferred over others and are hence more prevalent in that kind of work.

In the following paper, this student will address one of these typical performance management systems, known as Management By Objectives (MBO). He will begin by offering a brief overview of MBO, which is typically seen in organizations with a strong sales-driven environment, and what it looks for when analyzing an employee’s performance. Next, he will discuss its benefits and shortfalls. He will then close by proposing one major improvement to MBO in order to increase the credibility, reliability, and validity of this system. Throughout the paper, he will turn to academic research, personal work experience, and anecdotal evidence to explain and justify his position.

Overview of MBO

Management By Objectives (MBO), in short, is a performance management system that tracks and ultimately evaluates employee performance strictly by numbers-driven goals and results. Noe, Hollenbeck, Gerhart, and Wright (2010) admirably explain this system in more elaborate detail, stating that it, “…focuses on managing the objective, measurable results of a job or work group. This approach assumes that subjectivity can be eliminated from the measurement process and that results are the closest indicator of one’s contribution to organizational effectiveness” (p. 375).

An example of a typical MBO scenario can be found in the financial services industry. The agent, broker, or sales professional may have two goals that she or he must meet within the review period: increase the value of the portfolio she or he is managing by a pre-determined percentage, and/or take in a pre-determined dollar amount in fee revenues (Noe et. al., 2010, p. 376).

The Benefits of MBO

Noe et. al. (2010) points to 70 studies that took a look at MBO, of which 68 demonstrated gains in productivity, as strong evidence demonstrating the success rate of this particular performance management system. Additionally, “…productivity gains tend to be highest when there is substantial commitment to the MBO program from top management: an average increase of 56 percent when commitment was high, 33 percent when commitment was moderate, and 6 percent when commitment was low” (p. 376).

Shortfalls of MBO

Despite the advantages of the MBO performance management system, it does not come without its flaws and limitations. Noe et. al. (2010) points out that this system does not take into consideration circumstances beyond the control of the employee, such as difficult economic times. Also, while it may be true that there is feedback being given to the employee throughout the review period, that feedback may not provide any insights or suggestions as to how the employee can actually improve performance to meet the desired outcome(s). Furthermore, employees under MBO may be sacrificing facets of the job that are not being measured, such as customer service, in order to focus on the aspects that are coming under scrutiny (p. 378).

But beyond these flaws, it can be argued that certain elements of the Theory X management viewpoint appear to also come into play in an MBO scenario. This philosophy was conceived by Douglas McGregor. Managers who embrace the Theory X view tend to assume that their employees are unmotivated and even outright lazy, are always searching for ways to avoid taking responsibility, and, in general, dislike their work (Jones & George, 2011, pp. 58-59). If an employee falls short on meeting the targeted, objective goals, it would make it easy for a Theory X practitioner to easily and quickly conclude that the employee was not doing enough to meet said goals – in other words, it becomes a justification to accuse the employee of laziness, etc.

The management philosophy of Theory Y stands in stark contrast to the Theory X mindset. Theory Y, also formalized by McGregor, dismisses the ideas that employees are intrinsically unmotivated and afraid to assume responsibility and take action. Employees, under this viewpoint, may possess a variety of other skills that can be used somehow for the betterment of the organization, and they are eager to, if presented with the opportunity(ies), work for its good (Jones & George, 2011, pp. 58-59). For this student, this presents a major flaw in the MBO system, as it does not fully encapsulate the worth and value that an employee can have to an organization.

Returning to the missing puzzle piece of customer service and accountability, employees working within the framework of MBO may feel pressured to cut corners in these areas in order to meet the goals laid out by the organization. Sitkin, See, Miller, Lawless, and Carton (2011) spell out the potential harm that can occur in some of the more extreme cases, noting,

Moving from merely difficult goals at the individual level to the case of stretch goals at the organization level, the ethical implications could be amplified. The seeming impossibility of achieving stretch goals using ordinary means could easily slip into the seductiveness of using extraordinary means, such as falsifying records (p. 562).

Along these lines, albeit minus the falsifying of records, this student recalls some years ago being approached by a friend who had recently gotten into the insurance business. With the pressure mounting on him to fulfill his quarterly sales quota, he in turn applied pressure on this student, along with many other friends, family members, and business associates, to buy a policy from him, even if a legitimate need did not exist, and even if there was not a consultation involved to attempt to identify a need. He was not concerned if a policy was dropped shortly after, so long as it was purchased within this particular quarter (Personal communication, May, 2009). It quickly became evident that carrying his employment into the next quarter trumped quality customer service, which could have developed into long-term, rewarding, and mutually beneficial business relationships over time, with both repeat and referral business coming his way. In this sense, MBO is flawed, in that it seeks immediate gain while sacrificing long-term vision, stability, and sustainability.

In a similar situation, this student recalls having a more recent conversation with another friend who is a banker. The banker told this student that it did not matter if an account was closed shortly after; as long as it was opened in the first place, it would count toward the banker’s quarterly sales goals, and that’s all that mattered (Personal communication, December, 2011).

With this mindset, which is also demonstrated by this student’s friend in the insurance business, this student finds himself questioning if such short-term goals are really worth it to the organization. It takes time and money, in supplies and in labor, to process applications, deliver policies, open accounts, etc. Is it worth it to the organization if many of these account and policy holders turn out to be economically unviable, with their accounts and policies being closed or dropped shortly after being opened, or lingering on largely unfunded? This student has serious reservations.

What occurred at Sprint Nextel speaks volumes to how an MBO system can come to severely impact customer service and the longevity of accounts (Noe et. al., 2010, p. 402). Sprint and Nextel merged in 2005. Shortly after, the company put in place strict call center quotas that placed far more emphasis on number of calls answered over the quality of those calls. In other words, employees were pressured to keep all calls short, even if it meant the questions and concerns expressed by customers in those calls went unanswered, whether fully or partially. Paula Pryor, a former employee of Sprint Nextel, explained the impact this way: “…the numbers-driven management approach implemented after the combination led to poor morale and deteriorating customer service. Even bathroom breaks were monitored. ‘They would micromanage us like children’” (Noe et. al., 2010, p. 402).

Another situation shedding light on the insurance business specifically, and MBO in broader terms, occurred not long ago, when a business associate of this student was dismissed from his insurance agency for missing his annual sales quota by, according to his memory, “four or five policies” (Personal communication, January 2012). This man told this student that he valued customer service highly, and took as much time as necessary to explain to his clients and prospects exactly what they were getting into (Personal communication, January 2012). This is an example where this man may have possessed other abilities that could have benefitted this organization, yet, because of the MBO nature of the business and larger industry, he was dismissed on numbers alone. This system, as is currently practiced, does not take into consideration the quality, longevity, and economic viability of the policies and client relationships that resulted from this agent’s employment with the organization.

Finally, this student was employed in the car sales business for a short period of time. This business relies exclusively on MBO metrics. For this student, who has an extensive background in online marketing, it did not matter that the dealership this student was employed at had a need for a more robust online presence, which could have directly led to increased sales for the dealership as a whole. This student was hired as a salesperson. And it did not matter how much time he took with his customers and prospects in order to demonstrate a great customer service experience. Only actual sales mattered. The pressure was felt to cut that time spent accommodating questions and concerns, and to attempt to get them in a vehicle as quickly as possible. This student did not receive any meaningful feedback that would help him identify areas in which he could focus on for improved performance. He left the business voluntarily after a short while.

A Proposed Improvement to MBO

MBO, as it currently stands, offers a quick, easy-to-understand look at hard numbers and whether or not these goals are being achieved by employees who undergo this system of review. However, as previously explained, this performance management system only looks at immediate or short-term goals, as opposed to long-term objectives, and it only looks at hard sales data, not taking into account the human element or circumstances beyond the control of the organization or employee. Due to this short-sightedness, such a system could potentially damage, even destroy, opportunities for further growth, both because the deliverance of customer service is not taken into account and employees who may possess other talents and skills that could benefit the organization are being held only to these hard goals, potentially resulting in the termination of their employment if they fail to meet them. Furthermore, employees are not receiving vital feedback under this kind of performance management system that could help them improve their performance. It is this element, feedback, that this student wishes to respectfully submit as a major improvement to the MBO performance management system, particularly as it relates to customer service.

The value of feedback, in any organization or situation, cannot be overstated. Spreitzer & Porath (2012) name performance feedback as one of their four ingredients needed in order to create an environment that allows employees to truly thrive and realize their full potential. Walla (2011) submits that a quality performance evaluation will not only take into account what employees have (or haven’t) accomplished, but what they will do heading into the future in order to improve. Clausen, Jones, and Rich (2008) reinforce this by stating, “An effective system of evaluating job performance should accurately outline employees' responsibilities and contributions to an organization, motivate employees, and provide valid and important input in personnel decisions” (p. 64).

There is so much opportunity that can be capitalized on by merely incorporating some sort of feedback into the MBO model. Noe et. al. (2010) points out that, “While many companies use performance management to manage employee performance, less than 25 percent…use performance management to help manage talent through identifying training needs and developing leadership talent” (p. 352). The MBO system, as it is currently laid out, fails to take advantage of these opportunities.

This proposed feedback system should touch on items that would offer both the employee and the organization insight into how customer service is being addressed. Examples would include the rating of items such as product knowledge, the ability to solve problems, and people skills, much like what would be found in a graphic rating scale, another kind of performance management system widely in use (Noe et. al., 2010, p. 368).


In conclusion, it is certainly understandable that any organization wishes to see its defined, tangible goals met by its employees. This is where the Management By Objectives (MBO) performance management system can be of tremendous use in keeping employees on target to accomplish these objectives.

However, the MBO model for performance management leaves many questions and factors unaddressed. These include an employee’s other qualifications, skill sets, and education that may benefit the organization in other areas; circumstances beyond the controls of both the organization and its employees, such as turbulent macro-level economic distress; and the realm of customer service, an aspect of vital importance to the health and longevity of any organization. Finally, the MBO model fails to offer suggestions to employees on how performance can be improved.

This student submits that some sort of mechanism that addresses feedback in relation to customer service must be included in the current MBO system in order to fully gauge the long-term picture of the organization. While meeting short-term goals are great, it appears that a lot of factors surrounding quality are sacrificed, which validly calls into question whether meeting these short-term goals is always worth it.

It may not be easy implementing this proposed improvement to the MBO system, as any additions or improvements to any performance management system initially face an uphill battle with management, who, somewhat paradoxically, wishes to have an evaluation process that is all-encompassing, yet also wants to finish it as quickly as possible. Clausen et. al. (2008) acknowledges the difficulty of selling more thorough and accurate indicators of performance to management by pointing out that, “The process may take considerable time on the part of supervisors and may require subordinates to gather reams of information and prepare descriptions of their own performance. Some take the process very seriously, while others simply see it as a burden” (p. 64). Clausen et. al. takes it a step further, really honing in on the overall reliability of performance evaluations by stating,

Undoubtedly, performance evaluations rarely capture everything relevant in assessing employees' performance and their contributions to the organization over a period of time. Often, evaluations are forced into standard, predetermined formats that may omit important aspects of performance (p.66).

In the end, however, this feedback is critical to both the organization and employee. This student suspects, based on the research and personal experience presented, that a lot of high-quality opportunities are being missed by organizations.


Clausen, T. S., Jones, K. T. & Rich, J. S. (2008). Appraising employee performance evaluation systems. CPA journal, 78(2), 64-67.

Jones, G. R., & George, J. M. (2011). Contemporary management (7th ed.). New York: McGraw-Hill/Irwin.

Noe, R. A., Hollenbeck, J. R., Gerhart, B., & Wright, P. M. (2010). Human resource management: Gaining a competitive advantage (7th ed.). New York, NY: McGraw-Hill/Irwin.

Sitkin, S. B., See, K. E., Miller, C., Lawless, M. W., & Carton, A. M. (2011). The paradox of stretch goals: Organizations in pursuit of the seemingly impossible. Academy of management review, 36(3), 544-566. doi:10.5465/AMR.2011.61031811.

Spreitzer, G., & Porath, C. (2012). Creating sustainable performance. (cover story). Harvard business review, 90(1/2), 92-99.

Walla, N. (2011). Optimizing performance evaluations. Executive housekeeping today, 33(12), 18-19.

No comments:

Post a Comment