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 behaviours and ensure alignment with broader corporate objectives.

MBOs may not always be the best solution; however, they may turn out to be critical to drive the right behaviour and retaining 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
- the 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 performance on individual objectives is rated by reporting managers, which in turn also helps in tracking the manager’s performance. MBOs 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 behavioural 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 favouritism 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 salespersons and provide feedback whenever required
- Measurement scale should be designed to clearly differentiate performance based on different achievement levels
- Define strong process governance and 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 an additional administrative burden, but with the right mix of behavioural 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.