Management By Objectives MBO Paul Richardson, 2014 From Wikipedia --The essence of MBO is participative goal setting, choosing

g courses of action and decision making. An important part of MBO is the measurement and the comparison of the employees actual performance with the standards set. Ideally, when employees themselves have been involved with the goal setting and choosing the course of action to be followed by them, they are more likely to fulfill their responsibilities. According to George S. Odiorne, the system of management by objectives can be described as a process whereby the superior and subordinate jointly identify its common goals, define each individual's major areas of responsibility in terms of the results expected of him, and use these measures as guides for operating the unit and assessing the contribution of each of its members. The term "management by objectives" was first popularized by Peter Drucker in his 1954 book The Practice of Management. Current Status in Long Term User Organizations We often see problems with MBO use in long time user organizations. For example, the participative part of the process is often top down and directive based on the boss view of the objectives the employee should work to in support of the overall organizations objectives. This creates numerous problems because it perpetuates the managers narrow view of what must and can be done. The participative process must allow the employee to freely influence the goals they will own after the goals are fixed for the year. The top down approach does not access the more specific knowledge of the employee about their own part of the overall process and also constrains the employee from being allowed to mature and grow in their job while working for the best results in their own job. Without expecting/allowing free-wheeling, non-politically correct participation in the goal process, organizations turn employees into robots whose potential for improved performance is greatly hobbled. Another mistake organizations make is to tie the employees annual raise to a tight and arbitrary formula based on number of goals achieved and at what level. First, this encourages people to fear signing up for stretching goal, the exact kind the organization needs to perform excellently. This crank-turning approach is based on the desire of managers to abdicate their responsibility to tailor their management to the changing needs of the organization and turn the process into an easy-to-program algorithm requiring little thought. The stupidity of this approach can be demonstrated by a simple example. Lets assume that a couple of months after the goal setting process is complete, Employee A realizes that due to a massive outside change, the organizations very survival is in grave danger. The employee has the knowledge and the ability to save the day by working 100% of the time on meeting the new threat. Because of the efforts of Employee A, the organization survives and even improves its

competitive position in the market. Employee As performance could be compared to qualifying for a medal in the military, a huge raise in the GE that Jack Welch describes in his book, Winning, or some other hero type award like a promotion. However, because Employee As manager didnt change the goals for the year, when the computer spits out the raise formula, Employee A doesnt get a raise because they didnt achieve any of their other goals. Is that fair? Of course not! But in smaller ways for every user of formulaic as opposed to thinking and judgment approaches to salary determination it is very harmful to employees and the organization because nothing turns off employees more than being treated unfairly. What Are the Weaknesses of the MBO Process and What Should be Done? MBO Weaknesses Not Nimble - Setting goals in concrete once a year in todays environment of frenetic change is not an effective way to manage. Yes, you need goals but they need to be flexible and not tied directly to pay because otherwise they are like using an ax to do brain surgery. The results are not good. It is like being expected to drive a winding road in your car with a steering wheel that can only be positioned once a year. Not Participative in the true sense Tend to be top-down directives poorly translated from the general organization to the specific, an individuals scope of job responsibility. The lack of employee allowed real input leads to non-buy-in of the employee. They dont care what I think about where/how I could make the biggest contribution, so I dont care either. Limits Teamwork The top-down approach prohibits the ability of employees to contribute where they are strong or passionate because it isnt one of their goals. This allows non-productive turf protection and uncooperative behavior to flourish and leaves lots of performance potential untapped. Doesnt Pay for Performance Well Most of the pay increase formulas start by taking a budgeted organizational amount for total pay increases and spreads it around by a formula based on allowed goal achievement grades at the end of the year. Thus, someone who does a maintainer job can easily get a bigger raise than someone who contributes to break through performance. The old saying that you get what you pay for or get the behaviors you reward is true. So you are rewarding mediocre performance and that is what you get. In Jim Collins book, Good to Great, he shares the distinguishing differences he learned in his research of good and great organizations. One of his best insights was that people arent your most important resource, the right people are. How do you develop the right people? You, for sure, reward them for their individual contributions. That is, you need to spend your limited budget for raises

rewarding and encouraging your best performers not your mediocre or especially your lower performers.

What to Do Decouple raises from goal achievement but do couple raises to overall performance. Evaluate performance quarterly by ranking people of like job descriptions, ex. engineer, from best current performance to lowest performance. This is done by managers/supervisors in quarterly meetings. A higher level manager chairs the meeting to make sure that each person is discussed and input for other departments outside where they work are included. That is, you want the top ranked engineers in this case to be of demonstrated highest value to the overall organization not a specific department. The information a manager learns in the meeting about his/her staff is very valuable as feedback to employees about what they can do to correct problems brought out in the discussions at the meeting. After the ranking is complete you divide the stack into four quartiles. The top quartile should be made up of 10% of the population ranked. The next highest quartile would be comprised of the next 40% of the stack, the next below that to an additional 40% and the lowest 10% would comprise the bottom quartile. This approximates a normal or bell distribution. The quarterly rankings ensure that the organization is much more nimble and able to keep up with the increased pace of change most organizations face. Next you look at a persons pay versus their ranking. If underpaid the organization grants a raise to get them as close to their should be pay as the budget allows. If overpaid the organization does not grant a pay raise. The ranking information in terms of position in the stack is shared with each individual and is a great tool for discussing what the person needs to do to become more competitive. Say, cooperate better with other departments, get training in some new area, etc. This then becomes a great tool for developing the strength of your human resource as opposed to the current small pay raises that so inadequately reward the type of performance you want and need more of. Also, allow quarterly raises especially in cases where the persons pay is well below their should-be wage based on the stacking process.

For an in depth discussion of the Merit Pay process see http://www.scribd.com/doc/188243987/Merit-Pay-A-Tool-for-Organizations-that-wantneed-to-perform-better