Management by Objective (MBO) provides the highest degree of management flexibility. MBO programs empower supervisors to set goals for each of their subordinates. Measurement can vary from monthly, quarterly, to annual periods. Supervisors, often with employee participation, set goals for the coming performance period. Employees formally accept their goals for the period. At the end of the performance period, managers rate goal accomplishment. Optionally, employees can provide an initial assessment of their accomplishment prior to the supervisor rating. However, in almost all cases, employees can comment on the scores/results that the supervisor assigns them.

The performance rating system is point based or uses rating categories such as a five-level rating system (e.g., meets objectives, exceeds objectives, etc.).

Payout schedules, tied to job category, provide convert points or category ratings into incentive dollars.

MBO programs express incentive opportunities in a number of ways: percent of base salary, percent of salary range mid-point, or a target dollar amount. Some companies use corporate funding methods to create an incentive pool for payout purposes.

Payouts are normally capped at twice the target incentive amount. The company may also use forced distribution as part of the payout scheme, although this is less common.