Management by Objectives & Performance Appraisals

Instructor: Nick Chandler
This lesson looks at why companies have performance appraisals and one particular type of performance appraisal: management by objectives. We look at setting employee objectives and how this fits into the 6-step process of management by objectives.

Company Check-Up

A company that operates well is like a well-oiled machine. All the parts do their tasks and work together well. But is that enough? If your car runs well, it still needs its yearly service. In the same way, if management wants to be sure its company continues to run well, then a yearly 'check-up' is needed.

The check-up may involve the finances, the machinery, and the product quality, but also the biggest cost in most companies: the employees. When a company checks on the performance of its employees, it is called an appraisal, which means an assessment or measurement.

The Appraisal

An appraisal is a way of ensuring employees are performing well. However, checking on performance helps the company in lots of other ways: it can help decide who gets a salary raise, and how much; it can identify employee strengths and weaknesses; it can show if training and development are needed; and it can be used to reinforce the things that an employee does right.

How can management appraise the performance of its staff in a fair way, and at the same time, get all the benefits out of an appraisal? One way for the HR staff to appraise their employees is called management by objectives.

Management by Objectives (MBO)

Picture yourself in an office, about to be appraised by your boss for last year's work. You've worked well and wait to see what your boss says. Your boss tells you the company appraises people based on how green they are, how punctual they are to work, and how often they help colleagues. You fail on two counts, and even though you worked hard all year, you walk away with a poor appraisal. Seems unfair, doesn't it? How could you work for a whole year and only at the end find out what was important? It's too late. Management by objectives is an appraisal technique to make sure that this doesn't happen.

The way it works is, at the start of the year, you sit down with the HR manager or supervisor to discuss your objectives for the next year. These objectives must be SMART:

  • Specific. This means the objectives must clearly state the desired results, so that neither the management nor the employee can say at the end of the year: 'Sorry, I misunderstood what you wanted from me.'
  • Measurable. If your objective is working harder, then how can you prove you worked harder? Maybe, you can show proof with a record of longer hours at work, a higher amount of completed paperwork, or faster data processing. Whatever the way, it must be something which can be measured at the end of the year.
  • Attainable. This means that the objective must be something that the employee is actually able to achieve. It shouldn't be too easy, but it shouldn't be too tough either.
  • Relevant to what's to be achieved. Sometimes salesmen have an objective of getting their customers to pay their invoices within 30 days. At first, you wonder why a salesman should worry about payment for products sold. Surely this is the job of credit control in the accounts department? Well, if a salesman focused only on selling products, but not getting paid for the products, then the company would just have a list of promises to pay, but no money coming in. A salesman meets with customers all the time and would be the best person to give a gentle push for the customer to pay. This makes the objective relevant: it fits within the parameters of the salesman's job and fits the company's wider aim of making sure that it gets paid on time.
  • Timely. The objective also needs to have clear deadlines and milestones. Although the appraisal may be once a year, there may be objectives that are monthly or quarterly, depending on what is the most realistic date for completion of the objective.

MBO: The Process

The setting of objectives actually begins at the top of the company. It is within the scope of top management's goals that the employee and supervisor agree on the objectives at the start of a year. From the top down, we can see the process like this:

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