What is MBO?
MBO is an acronym for Management by Objectives, and is a method of improving organizational performance by setting clearly defined goals agreed upon between employees and management. Companies that set goals quarterly in the form of MBOs see 31 percent greater returns from their performance process than those who set goals yearly.
What is OKR?
On the other hand, OKR stands for Objectives and Key Results, and can be described similarly, as a way of setting and communicating organizational goals, with the aim of getting everyone moving along the same path.
How are MBO and OKR Related?
When it comes to managing employee performance, MBO and OKR are like the parent and the child. MBO Programs were invented by Peter Drucker in 1954, and OKR was introduced by Andy Grove about twenty years later in the 1970’s. The two approaches have just enough in common to be recognized as related, but they have some key differences that set them apart from one another. That said, both models help managers set goals for their employees and ensure that they meet them.
Key Differences Between MBO and OKR
Depending on the company and the OKR system it happens to be using, this type of program has a plan duration that’s reviewed monthly or quarterly. This differs from the MBO plan, which can be set for the year or the quarter. However, the idea for both management programs is to engage in sales performance reviews as frequently as possible.
If managers are setting goals once a year, those goals will likely be loftier and broader than those from the manager who sets goals each quarter; quarterly goals often have to do with very specific projects. The idea to keep in mind is that for both OKR and MBO, the best practice is to review quarterly at the least.
Another component that differs between the two models is the way that performance is measured. In the case of OKR, the measurement is always quantitative. The consistent scoring model is set up to be calculable and precise. MBO is more flexible in its mode of measurement.
Depending on the organization, its goals for the performance management system, and the specific managers and employees the plan can be set up to be quantitative, qualitative, or both. With MBO, scoring can differ across various goals.
The way in which you report your employee’s progress also varies between MBO and OKR. MBO measurements are often tailored to the objective in question, while OKR measurements are consistent, regardless of the objective.
Another big difference is the measurement expectation. When you’re using MBO, you are expected to achieve 100%, if not overachieve. In OKR, if you hit 100% consistently, you are not setting aggressive enough goals. Measurements should generally end up in the 60-70% range.
The share of the audience still belongs to MBO, which is the big fish, or the parent system if we continue with the family of performance management simile. That said, while OKR is still small, it's growing.
If you’re interested in learning how Xactly’s MBO product can help you build a better-aligned team with a high-performance culture, check out Xactly Objectives™ today, or learn more about the MBO bonus, or take a look at a few MBO examples.
As part of your compensation plan, MBOs give each rep individual goals to strengthen the overall sales organization (OKR). And, they can have a big impact on sales team engagement and motivation. OKRs differ since they are a management tool, not an employee evaluation tool.
Performance compensation, which is entirely about incentivizing an individual employee, should be independent from their OKRs and based on role and skill sets. MBO programs, especially ones that are automated, can be an extremely useful tool in addition to your sales commission structure.