Don’t Abolish MBOs
Brad Feld has a great post, No More MBOs, where he puts into question the usefulness of MBO-based bonuses in startups. It’s a good read, including the discussion.
I agree with Brad that linking bonuses to MBOs can be messy, so let’s abolish that. But, let’s not throw the baby with the bath water. Let’s not give away MBO all together.
Let me start with a historical perspective on MBOs and its usefulness.
Hewlett-Packard is the company that popularized the practice of Management by Objectives. I have some deep history with the practice of Management by Objectives, having worked at Hewlett-Packard for 14 years, most of them as a manager. And I was involved in several MBO planning sessions, implementations, performance appraisals, salary reviews, ranking sessions, etc., all that fun stuff that big companies do.
Peter Drucker wrote a chapter, entitled “Management by Objectives and Self-Control” in his 1954 book The Practice of Management. But that didn’t have near the depth of implementation details that came later when HP practiced it, and made it an integral part of “The HP Way”.
In 1995, two years prior to his passing, David Packard published the book “The HP Way: How Bill Hewlett and I Built Our Company.” I remember when a copy of that book showed-up one day on my desk. Each of the 100,000 employees received a free copy. In that book, Packard wrote “No operating policy has contributed more to Hewlett-Packard’s success than the policy of management by objectives.” Indeed, MBO had been a fundamental part of HP’s operating philosophy since the very early days of the company, which was founded in a Silicon Valley garage in 1939.
MBO was conceived when Hewlett and Packard realized that the only way to manage their growing number of employees that were scattered in different locations, was to assign them objectives, but to give them the freedom to achieve them in the ways they determine best, in their own areas of responsibilities. A key part of the MBO process is that these objectives had to be clearly communicated and linked to each other, and across departments.
MBO was the philosophy of decentralization in management, and it was anti-micro-management. It was about how modern enterprises were going to be managed.
Later, in 1976 HP’s subsidiary in Japan (YHP) evolved MBO into what was called the hoshin process, from the Japanese words hoshin kanri, which meant direction setting. What hoshin did was to put more rigor into the MBO planning methodology, specifically on the cascading effects and how objectives, strategies, objectives and measures were all linked together.
I remember very well the hoshin planning process, because it was tedious and very detailed. We were handed tables with a specific format that we had to follow, and progress was reviewed monthly. You couldn’t have slides without your hoshin tables in them, during a management review meeting. It was one of the first things you had to talk about. It really kept the whole organization well informed, on-track, focused and well managed.
Fast forward to 1999, when John Doerr introduced OKR’s to Google’s leadership, when they were less than a year old, Objectives and Key Results. It was really a simplified version of hoshin and MBO. (And I’m skipping the Balanced Scorecard from that historical).
OKR consists of setting an objective, and also a series of measurable results aligned with that objective. It’s MBO by another name, and it helped you to align strategy with objectives to deliver results.
OKR was explained in the following manner, using the Football analogy.
Football GM
Objective: Make money for owners
Key Results: 1) Win Super Bowl, 2) Fill stands to 88%
Head Coach
Objective: Win Super Bowl
Key Results: 1) 200 yard passing, 2) No. 3 in defense stats, 3) average 25 yard punt return
Public Relations
Objective: Fill stands to 88%
Key Results: 1) Hire 2 colorful players, 2) Highlight key players
And that cascaded down to the Defense, Offense, News Staff, etc.
Google took OKRs like duck to water, and has been using them since then, in the same way that HP depended on MBOs, and with a similar outcome: to keep everybody on the same page, to let employees focus on results, and more importantly, to make sure that everything was linked according to that magical cascading effect.
MBO Distortion
But sometime in the past 5-10 years, the MBO concept got derailed when financial bonuses were attached to them. In the historical I just covered, a bonus was never attached to the MBO. MBO is about doing your job, and it’s about how managers can manage the common goals that a company has.
An MBO-based bonus derailment can happen when an employee is obsessed with achieving an objective, and has an MBO deadline that ends up costing the company a lot more than the expected bonus, therefore creating a conflict of interest.
That can happen, but it shouldn’t happen. In this case, the MBO was not properly developed, and it was not properly managed. Furthermore, a bonus should not have been attached to it.
Back to Brad’s post, and he has asked the question, so here are my recommendations (this doesn’t apply for sales compensations):
- Abolish programmatic bonus formulas that are tied to the MBO.
- Fold personal/qualitative MBOs inside the Quantitative MBOs, and deliver the individual’s performance assessment during a 1:1 performance evaluation.
- Don’t use the MBO on its own as a direct bonus kicker. Use it to qualify the employee for the bonus.
- Have a separate compensation and bonus plan that includes both company-wide top-down thresholds and managerial discretion for the right allocation.
Don’t abolish MBOs. Abolish MBO-based bonuses.
I’ve had dollars and equity attached to MBOs since the late 90s William.
I’ve never worked for a company that call it MBO or not, didn’t have some tie to what you accomplished and upside. Done right it can work.
“Abolish MBO-based bonuses.” Agree. And one way to do this, even if it’s thin in substance, is to call them something else. OKR and KPI is a shot at it. That’s fine – everyone wants their own methodology. But fundamentally the notion is to decouple comp as the “motivator.”
I don’t get it. What *else* would you base your incentive comp (i.e. bonuses) on, if not the objectives the business values? Isn’t that the whole point of “incentive” comp, to compensate for achieving benefits for the business?
“You get what you incent.” If you think the person is achieving their objectives, even obsessing over them, but those objectives are not good for the business, then don’t kill the payment by objectives! Just change the actual objectives to good ones.
Sounds like what you need is a better process to change objectives mid-flight.
Yes, MBO is not an incentive plan. Tying it to a bonus blindly will give you blind spots.
First, this thinking doesn’t apply to sales people, where the commission/bonus is entirely driven by the sales numbers that were achieved. So, that eliminates a lot of discussion on that topic.
MBO is a “Management” tool, not an incentive tool. You use the MBO as input into the incentive/compensation plan. You pay for Performance. Performance includes achieving objectives, but not solely, and certainly not blindly.
Done right, it works. Maybe it’s semantics. Goal-related incentives work, yes. But MBO in its original conceptual form is a “management tool”, not an incentive tool. It is used to align the organization along objectives and link the whole thing together.
You can pay for results achieved, of course. But that’s not MBO. I was birthed in MBO from day 1 of my working career in 1982. And it wasn’t tied to a bonus or comp plan. It was about doing your job.
Why should sales people be any different (other than Norm Brodsky, who firmly believes sales staff should not be commissioned, but a different day..)?
The idea is the same: in your job, here is what is useful to the company, i.e. here are your objectives. Achieve them, you have created value, so we will pay you for that value.
Blindly, no, but you remove the blinders by changing objectives.
In my years on Wall Street (well, when I worked at the better firms…), I had objectives, and hit them, and got incentive comp. Probably the biggest part was the stuff that wasn’t in my *start-of-year* objectives, but initiatives I had throughout the year. But those just meant we changed the objectives, not ignored them.
You were birthed in big company culture then William because below a certain level of size or revenue this idea is not applicable.
10 or 20 people building stuff pre market with funding. The idea of groups and departments is irrelevant mostly.
I’m nudging you but your taking the bait. These concepts like MBOs are bigger company ideas. And good ones but they exist only as tools within a certain sized framework.
We all manage people but how is not dependent on the tool it is dependent on the dynamics of the company. That is size dependent.
Your football analogy shows the issue with MBO’s. Our PR person needs to hire 2 colorful players to achieve their MBO. Those 2 colorful players could very likely kill the culture of the team and cause so much strife that the Head Coach can’t achieve his MBO’s. Whether or not the MBO has a cash value associated with it.
There is no “one size fits all” answer here – but Brad’s perspective is largely coming from pre-revenue, small companies – where EVERYBODY has to be rowing in the same direction, at the same speed. Individuals must perform, certainly – but the goal is an overarching goal, not an individual one.
For larger companies, I’m sure the MBO/OKR model is as good as any. But for a startup, I prefer not to use MBO’s and rather focus on company objectives. And given the name of your blog, that is our focus, no? 😉
Of course this isn’t applicable to small startups, but what started this conversation was Brad’s post, and his context was up to 1000 employees. I think it starts to make sense at over 200 employees roughly, especially if they are in different offices.
You are right on.
I think it makes sense at less–in fact I think this is more pertinent to the stage of the company which # of employees may not be good determinant.
True. But I’m pretty sure that over 200 employees, an MBO discipline would be beneficial. Brad’s context was oriented towards the scaling-up stage. Yes, my focus is on the growth/scaling-up stage, beyond the initial 1-15 employee startup phase.
But MBO is something that I’ve had a lot of experience with, during the HP days, and working at Cognizant, a very global player that had an incentive program.
Exactly.
Where it won’t work is when the objective is/needs to be a moving target.
Hi Avi,
Sales performance is typically a very clear cut. It’s about numbers. Either you hit it or not.
Objectives, although measurable are not always as clear cut. You need a human management to incentive buffer to calibrate their translation. Sometimes, it’s simple and it works, but often it doesn’t, and you end-up either lowering the way you measure or getting into conflict.
The key point of my post is that I know about MBO from the source who created it and practiced it (HP), and they were never programmatically tied to the incentive. They are tied to your Performance Evaluation.
Then you have shorter review cycles as needed, and you adjust. My main point is that MBO is a management tool, not an incentive trigger.
Dear Disqus — it’s not me, it’s you…you keep eating my comments!
Love, Anne
And Dear William — I agree 110%
Actually, even sales can get amorphous. A sales guy with a $2MM nut might only hit $500k, but might have created a pipeline with $5MM in oppos for next year. So even that requires “human management.”
I think we are actually similar. I am just more comfortable with MBOs being more directly tied to your PE, which determines your incentive.