Management by Objectives
What is MBO?
A personnel management model aiming to improve performance by defining objectives agreed upon by management and employees.
Pioneered by Peter Drucker, Management by Objectives (MBO) focuses on cascading goals down an organizational hierarchy. Employees and managers mutually agree on specific objectives for the year, and performance reviews are tied strictly to hitting those objectives.
While MBO was revolutionary in the 1950s, modern companies often struggle with it because it ties compensation directly to goals, which encourages sandbagging—employees intentionally setting low goals to guarantee they get their bonus.
While MBO was revolutionary in the 1950s, modern companies often struggle with it because it ties compensation directly to goals, which encourages sandbagging—employees intentionally setting low goals to guarantee they get their bonus.
Classic MBO Approach
The CEO wants 20% revenue growth. The VP of Sales tells reps their annual bonus depends strictly on selling $1M each.
MBO Pitfall (Sandbagging)
A sales rep knows they could sell $1.5M, but only negotiates for a $900k target to guarantee their year-end bonus.
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