MBO (Management by Objectives) as a strategic tool


Management by Objectives (MBO) is a business strategy that allows organizations to define individual level goals based on desired activities and behaviors and ensure alignment with broader corporate objectives.

management by objective

MBOs may not always be the best solution; however, they may turn out to be critical to drive the right behavior and retain top performers in specific situations. Organizations can use MBOs for either of the below situations;

  • impacted sales data cannot be easily aligned to a salesperson
  • high variance in sales data
  • data quality is poor
  • regulatory environment is stringent
  • delay in availability of final performance data
  • non-sales activities such as coaching, training, etc

MBO definition revolves around the use of non-sales based performance measures. The tracking paradigm is defined to evaluate pre-defined objectives with measurable results in a time-bound environment. Individual’s performance on individual objectives is rated by reporting managers which in-turn also helps in tracking the manager’s performance. MBO type of incentive plans was mostly used for line managers and other managerial roles but are becoming more prevalent for roles like MSLs (Medical Science Liaisons), KAMs (Key Account Managers) during pre-launch, and also for instances where certain behavioral changes need to be pushed such as digital adoption and engagement during corona pandemic.

MBO plans are easier to communicate and also allow better control over sales incentive outflow. However, there are significant risks associated with this type of incentive plan in general:

  • The subjective nature of evaluation at times spreads the perception of favoritism or unfairness
  • May result in “Managing the Manager” instead of “Managing the Performance”
  • Lesser differentiation within salesforce resulting in discontent among better performers
  • Significant administrative overhead and burden for field management
  • Requires strong process governance measures

Key Aspects for creating an effective MBO program:

  • Educate managers to set objectives based on the SMART framework
  • Proactively communicate the desired activities and link them to the expected outcome
  • Managers should constantly take updates, guide salesperson and provide feedback whenever required
  • Measurement scale should be designed to clearly differentiate performance based on different achievement levels
  • Define strong process governance, guidelines and incorporate an all-encompassing communication framework
  • Identify the right set of tools to summarize and use MBO outcomes during the performance appraisal period

It is true that managing MBOs requires additional administrative burden but with the right mix of behavioral changes and platforms, MBO programs can be managed a lot more effectively. This enables organizations to focus on the strategic value of the program instead of worrying about operational challenges.

Reach out to me at amit.jain@aurochssoftware.com if you would like to bounce off ideas on how to significantly improve the strategic value of your MBO program.

Post Author
Amit Jain
Co-founder & Director of Customer Success

Amit has more than 15 years of experience engaging with several healthcare companies in consulting projects. His expertise lies primarily in the areas of incentive compensation, salesforce effectiveness, business intelligence and analytics. Prior to co-founding Aurochs Software, he worked with several leaders in the incentive compensation space such as ZS Associates, Optymyze (former Synygy) for almost 10 years in several leadership positions leading several product and service initiatives. He was part of IC leadership team at ZS Associates and led the formation of offshore center of excellence for incentive compensation design and delivered several key client projects.