Written By: David Winter – Corporate Finance
Peter Drucker, the author of The Practice of Management, originally published in 1954, was the first to coin the idea of “management by objectives” (MBO). According to Drucker, the manager of the future should have clearly defined objectives that employees and management both agree to uphold. This management style allows flexibility on the side of the employees by giving them the liberty to decide the best ways to achieve set goals. While the idea may look promising in its literal meaning, the consequences of its application are not always desirable.
Case in point: the current woes facing Wells Fargo, which provide a perfect picture of how detrimental the effects of this type of management style can be to the reputation and well-being of an organization. The scandal facing the bank involves its employees opening more than two million phony accounts using the details of the bank’s existing customers, without their consent. During the investigation, it has been discovered that management’s insistence on the employees meeting their sales goals might have pushed them to engage in this unethical behavior.
The concept of management by objectives is to assess employees’ performance basing on quantitative metrics. In the case of Wells Fargo, it has emerged that the bank’s sales employees were being pressured by their managers to meet set targets within short time periods of up to one hour. The failure to meet the set targets was enough to have employees denied bonuses or even fired. While setting measurable goals for employees may give the organization the exact results it seeks, it does not address the processes used or the quality of the services offered.
If employees’ performance is measured based on the number of new accounts they open in a given period, a lot of accounts will be opened, but only a few will be of quality. The employees may not open fake accounts, but they are likely to coerce unwilling customers to open accounts, the majority of which will be closed within a short time. Wells Fargo had been setting strict quotas regulating the number of “daily solutions” that its bankers needed to reach to retain their positions and earn bonuses; these “daily solutions” included hitting set daily targets for opening new banking and credit card accounts.
Pressuring employees to hit a set of quantitative goals not only makes them lose focus on the general well-being of the company but might force them to engage in fraudulent activities to retain their jobs and earn bonuses. Likewise, if you measure the employees’ performance by the hours they spend at work, you are likely to end up with a lot of employees surfing the Internet until midnight. As Matt Levine, a Bloomberg View columnist, notes, a quantitative measure of performance regards set objectives with their literal meaning and does not guarantee the general “good thing” that was intended in the measure.
Drucker himself later changed his mind on the effectiveness of the management by objectives approach when he said that it is not the great cure of management inefficiency. According to Drucker, MBO works when the objectives are known, and 90 percent of the time they are not known. While Wells Fargo may have assumed that it had its objectives figured out, the current crisis shows that from the beginning, the management of the bank did not understand the bigger picture when setting its short-term targets. Also, the consequences of pushing employees to deliver quantifiable results were not identified from the beginning.
It is important to note that while the MBO approach has widely been criticized and its application has proved to be disastrous for some companies, there are those that have gotten it right. For instance, the American multinational information-technology company Hewlett-Packard (HP) has in the past declared MBO to be an integral part of its successful management style. At every level of management in HP, managers are expected to develop objectives and put them in line with those of other managers and the whole organization. As mentioned earlier, the management by objectives style is effective only when an organization is sure of its objectives. There is much that organizations can learn from the HP management style to effectively apply the MBO model.