Widely known as “management by objectives,” goal-oriented performance appraisal is an evaluation method for employee job performance. Peter Drucker first introduced the MBO concept in his book “The Practice of Management,” published in 1954. The basic principles of MBO are to maintain a systematic and focused approach to attain an organization’s goals, and to get the best results from available resources through aligning work behavior, results and career goals of employees with the organization’s goals.

MBO Cycle

The MBO method is a cyclical process that consists of five steps. The first step is to determine achievable goals at top management level for the particular operating period and cascade the same to each level of organization. The second step is for the organization to assign employees with a set of objectives that they try to achieve during the operating period specified. Discussion and mutual agreement between employees and managers establish these objectives. The third step is to monitor goal progress. Managers establish management information systems to monitor goal progress and coach employees to improve their work behavior. The fourth step is to assess employee job performance. The organization rates employees against the goals they achieve during the given operating period. The fifth step is to recognize and reward top achievers. Managers make important decisions on employees such as promotion, pay raise, training and transfer based on their job performance. MBO process for the given operating period ends here and managers prepare MBO for next operating period with revised objectives.

Criteria for Objectives

The most important step in the process of MBO is to set reasonable and attainable objectives. For MBO to be effective, the objectives should be specific, measurable, achievable, challenging and time-related. In addition, objectives should be simple and transparent so that each department, manager and employee understands the organization’s expectations and what they get in return.


MBO implements the normal management functions of planning, control and motivation in a systematic and logical manner. MBO is an effective tool to keep managers focused on their objectives through a constant review mechanism. Set objectives for employees are helpful for motivational and organizational planning purposes. Furthermore, MBO increases employee involvement and commitment towards work.


The major limitation of MBO is that the emphasis is more on objectives. In a highly competitive environment, management that adopts the MBO method tends to set its objectives based on competitors’ results. This may lead the management to set unrealistic objectives. Goal-oriented performance appraisal system eventually creates a rigid and authoritative atmosphere through a constant review mechanism, which may result in employee dissatisfaction.