INTRODUCTION

The concept of MBO is closely connected with the concept

of planning. The process of planning implies the existence of objectives
and is used as a tool/technique for achieving the objectives. Modern
managements are rightly described as 'Management by Objectives'
(MBO). This MBO concept was popularized by Peter Drucker. It suggests
that objectives should not be imposed on subordinates but should be
decided collectively by a concerned management. This gives popular
support to them, and the achievement of such objectives becomes
easy and quick
Management by Objectives (MBO) is the most widely
accepted philosophy of management today. It is a demanding and
rewarding style of management. It concentrates attention on the
accomplishment of objectives through the participation of all
concerned persons, i.e., through team spirit. MBO is based on the
assumption that people perform better when they know what is
expected of them and can relate their personal goals to organizational
objectives. Superior subordinate participation, joint goal setting, and
support and encouragement from superior to subordinates are the
basic features of MBO. It is a result-oriented philosophy and offers
many advantages such as employee motivation, high morale, effective
and purposeful leadership and clear objectives before all concerned
per-sons. MBO is a participative and democratic style of management.
Here, ample scope is given to subordinates who are given higher status
and a positive/participative role. In short, MBO is both a philosophy
and an approach to management. MBO concept is different from MBC
(Management by Control) and is also superior in many respects.
According to the classical theory of management, top management is
concerned with objective setting, directing and coordinating the efforts
of middle level managers and lower level staff. However, the
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achievement of organizational objectives is possible not by giving
orders and instructions but by securing the cooperation and
participation of all persons. For this, they should be associated with the
management process. This is possible in the case of MBO, and hence,
MBO is different from MBC and also superior to MBC.
MBO is an approach (to planning) that helps to
overcome these barriers. MBO involves the establishment of goals by
managers and their subordinates acting together, specifying
responsibilities and assigning authority for achieving the goals and,
finally, constant monitoring of performance. The genesis of MBO is
attributed to Peter Drucker, who has explained it in his book 'The
Practice of Management'.
DEFINITIONS OF MANAGEMENT BY OBJECTIVES
According to George Odiome, MBO is "a process whereby
superior and subordinate managers of an Organisation jointly define its
common goals, define each individual's major areas of responsibility in
terms Of results expected of him and use these measures as guides for
operating the unit and assessing the contribution of each of its
members."
According to John Humble, MBO is "a dynamic system
which seeks to integrate the company's needs to clarify and achieve its
profits and growth goals with the manager's need to contribute and
develop himself. It is a demanding and rewarding style of managing a
business."

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MANAGEMENT BY OBJECTIVES (MBO)

For many people working in modern business environments,

it's hard to remember a time when non-managerial employees weren't
involved with and interested in corporate strategy and goals. We are
regularly reminded about the corporate mission statement, we have
strategy meetings where the "big picture" is revealed to us, and we are
invited to participate in some decisions. And we're aware of how our
day-to-day activities contribute to these corporate goals.
This type of managing hasn't been around forever: It's an
approach called Management by Objectives, a system that seeks to
align employees' goals with the goals of the organization. This ensures
that everyone is clear about what they should be doing and how that is
beneficial to the whole organization. It's quite easy to see why this type
of managing makes sense – when the parts work in unison, the whole
works smoothly too. By focusing on what you're trying to achieve, you
can quickly discriminate between tasks that must be completed and
those that are just a waste of valuable time.

BACKGROUND
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 Management by Objectives was introduced by Peter
Drucker in the 1950s and written about in his 1954 book, The Practice
of Management. It gained a great deal of attention and was widely
adopted until the 1990s, when it seemed to fade into obscurity.
Partly, the idea may have become a victim of its success:
It became so much a part of the way business is conducted that it no
longer may have seemed remarkable or even worthy of comment. And
partly, it evolved into the idea of the Balanced Scorecard, which
provided a more sophisticated framework for doing essentially the
same thing.
FIVE STEPS OF MANAGEMENT BY OBJECTIVES
The five-step process for MBO shown in figure 1,
below. Each stage has particular challenges that need to be addressed
for the whole system to work effectively.

THESE STEPS ARE EXPLAINED BELOW:

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 1. Set or Review Organizational Objectives
MBO starts with clearly defined strategic organizational
objectives (see our article on Mission and Vision Statements for
more on this.) If the organization isn't clear where it's going, no one
working there will be either.
2. Cascading Objectives Down to Employees
To support the mission, the organization needs to set
clear goals and objectives, which then need to cascade down from one
organizational level to the next until they reach everyone. To make
MBO goal and objective setting more effective, Drucker used the
SMART acronym to set goals that were attainable and to which people
felt accountable. He said that goals and objectives must be:
Specific
Measurable
Agreed (relating to the participative management principle)
Realistic
Time related
Notice the "A" in SMART is "agreed." This is sometimes referred to as
"achievable" but, with MBO, agreement about the goals is a critical
element: It's not enough for the goals and objectives to be set at the
top and then handed down. They must flow, or trickle, down through
various stages of agreement. The only goal that is going to be met is
one that is agreed on. How much easier is it to get buy-in when the
person responsible for achieving the goal had a hand in developing it?
For each objective, you need to establish clear targets
and performance standards. It's by using these that you can monitor
progress throughout the organization. These are also important for

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communicating results, and for evaluating the suitability of the goals
that have been set.

3. Encourage Participation in Goal Setting

Everyone needs to understand how their personal goals fit
with the objectives of the organization. This is best done when goals
and objectives at each level are shared and discussed, so that everyone
understands "why" things are being done, and then sets their own
goals to align with these.
This increases people's ownership of their objectives.
Rather than blindly following orders, managers, supervisors, and
employees in an MBO system know what needs to be done and thus
don't need to be ordered around. By pushing decision-making and
responsibility down through the organization, you motivate people to
solve the problems they face intelligently and give them the
information they need to adapt flexible to changing circumstances.
4. Monitor Progress
Because the goals and objectives are SMART, they are
measurable. They don't measure themselves though, so you have to
create a monitoring system that signals when things are off track. This
monitoring system has to be timely enough so that issues can be dealt
with before they threaten goal achievement. With the cascade effect,
no goal is set in isolation, so not meeting targets in one area will affect
targets everywhere.

5. Evaluate and Reward Performance

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 MBO is designed to improve performance at all levels
of the organization. To ensure this happens, you need to put a
comprehensive evaluation system in place. As goals have been defined
in a specific, measurable, and time-based way, the evaluation aspect of
MBO is relatively straightforward. Employees are evaluated on their
performance with respect to goal achievement (allowing appropriately
for changes in the environment.) All that is left to do is to tie goal
achievement to reward, and perhaps compensation, and provide the
appropriate feedback. Employees should be given feedback on their
own goals as well as the organization's goals. Make sure you remember
the participative principle: When you present organization-wide results,
you have another opportunity to link individual groups' performances
to corporate performance. Ultimately, this is what
MBO is all about why, when done right, it can spur
organization-wide performance and productivity.
CHARACTERISTICS OF MBO
MBO focuses on the determination of unit and
individual goals in line with the organizational goals. These goals define
the responsibilities of different parts of the organisation and help to
integrate the organisation with its parts and with its environment.
MBO seeks to balance and blend the long-term
objectives (profit, growth, and survival of the firm with the personal
objectives of key executives. It requires that all corporate,
departmental, and personal goals will be clearly defined and
integrated.

Participation:

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 The MBO process is characterized by a high degree of
participation of the concerned people in goal setting and performance
appraisal. Such participation provides the opportunity to influence
decisions and clarify job relationships with superiors, subordinates, and
peers.
It also helps to improve the motivation and morale of the
people and results in role clarity. Participative decision-making is a
prerequisite of MBO. MBO requires all key personnel to contribute
maximum to the overall objectives.
Key Result Areas:
The emphasis in MBO is on performance improvement in
the areas that are of critical importance to the organisation as a whole.
By identification of key result areas (KRAs), MBO ensures that due
attention is given to the priority areas which have significant impact on
performance and growth of the organisation.
The goals of all key personnel are properly harmonized and
they are required to make maximum contribution to the overall
objectives. Key and sub Key areas are identified for each function, as
shown in the following example:
Finance (Key Area)
Sub-Key Areas:
(a) Cash flow
(b) Dividend Policy
(c) Debt-equity Ratio
(d) Sources of Funds
The role of each department towards the Key and sub-key areas 15 is
also specified.
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Systems Approach:
MBO is a systems approach to managing an
organisation. It attempts to integrate the individual with the
organisation and the organisation with its environment. It seeks to
ensure the accomplishment of both personal and enterprise goals by
creating goal congruence.
Optimization of Resources:
The ultimate aim of MBO is to secure the optimum
utilization of the physical and human resources of the organisation.
MBO sets an evaluative mechanism through which the contribution of
each individual can be measured.
Simplicity and Dynamism:
MBO is a non-specialist technique, and it can be used
by all types of managers. At the same time, it is capable of being
adopted by both business and social welfare organizations. MBO
applies to every manager, whatever his function and level, and to any
organisation, large or small.
Operational:
MBO is an operational process that helps to translate
concepts into practice. MBO is made operational through periodic
reviews of performance, which are future-oriented and involve self-
control.
Multiple Accountability:
Under MBO, accountability for results is not
centralized at particular points. Rather, every member of the
organisation is accountable for accomplishing the

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goals set for him. Multiple centers of accountability discourage 'buck-
passing' and 'credit-grabbing'. MBO establishes a system of
decentralized planning with centralized control.
Comprehensive:
MBO is a 'total approach'. It attaches equal importance to the
economic and human dimensions of an organisation. It combines
attention to detailed micro-level, short-range analysis within the firm
with emphasis on macro-level, long-range integration with the
environment.

FEATURES OF MBO
 Superior-subordinate participation: MBO requires the superior
and the subordinate to recognize that the development of
objectives is a joint project/activity. They must jointly agree and
write out their duties and areas of responsibility in their respective
jobs.
 Joint goal-setting: MBO emphasizes joint goal-setting that is
tangible, verifiable, and measurable. The subordinate, in
consultation with his superior, sets his own short-term goals.
However, it is examined both by the superior and the subordinate
that goals are realistic and attainable. In brief, the goals are to be
decided jointly through the participation of all.
 Joint decision on methodology: MBO focuses special attention on
what must be accomplished (goals) rather than how it is to be
accomplished (methods). The superior and the subordinate
mutually devise a methodology to be followed in the attainment
of objectives. They also mutually set standards and establish
norms for evaluating performance.

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  Makes way to attain maximum result: MBO is a systematic and
rational technique that allows management to attain maximum
results from available resources by focussing on attainable goals. It
permits a lot of freedom to subordinate to make creative decisions
on his own. This motivates subordinates and ensures good
performance from them.
 Support from superiors: When the subordinate makes efforts to
achieve his goals, the superior's helping hand is always available.
The superior acts as a coach and provides his valuable advice and
guidance to the subordinate. This is how MBO facilitates effective
communication between superiors and subordinates for achieving
the objectives/targets set.
MANAGEMENT OBJECTIVES
Objectives are described as the results to be achieved by an
organization. Managerial objectives may be defined as the goals that
are predetermined, which have a defined scope and the methodologies
that suggest direction to the efforts of managerial personnel.
In order to achieve the managerial objective the management
should clearly define and effectively communicate these objectives to
all the concerned people. The objectives should be formulated in such
a way that they are attainable with the available resources as the
objectives reflect or determine the ultimate goals of the organization.

The importance of managerial objectives is as follows:

 They provide a basis for the performance.
 They establish the identity of the enterprise.
 They provide direction to organized effort.
 They help in uplifting the morale and motivate employees.
 They provide the basis for decision-making.
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  They provide a basis for control.
The objectives of management can be classified as economic
objectives, human objectives, social objectives and organic objectives.

ECONOMIC OBJECTIVES
Profit earning – Every business organization is established
with a motto to sell or make goods and services to attain a substantial
profit. So it is inevitable for an organization to face uncertainties in a
business cycle, change in demand pattern, fluctuation in money
markets, and changing outlook of customers. All these have to be
managed so that the organization earns profit and, in turn, the
organization should share its profits with society.
Production of goods – When an organization is established to
earn profits, for doing so, it has to produce goods by optimal utilization
of resources like men, money, material and machinery which could lead
to the increase in efficiency and getting higher productivity with
minimum effort and the goods so produced are sold in the market.
Customer satisfaction is the factor that decides the economic growth of
the organization.
Creating markets – All the goods produced have to be sold. To
do so, the objective of an organization is to open up new markets,
penetrate into existing markets, and increase the market share. The
businessmen look for new consumers for increasing their sales and also
to retain customers by supplying better quality of goods at reasonable
prices.
Technological improvement - As the markets are highly
competitive and the products are pushed into the market to meet the
needs of customers, to retain the place in market it is evident that the

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businessmen should always strive to upgrade the technologies used for
production and change to the new market environment and should be
in a position to produce and offer good quality goods with lower prices.

HUMAN OBJECTIVES

Employees' welfare – The basic objective of earning profit

could be possible only when the employees are committed to work as
they help in increasing the profit of the firm. So, that management has
a responsibility towards the employees to look after then by providing
all possible benefits to employees and help in increasing the quality of
living standards of the employees
Satisfaction of customers – The consumer should be provided
with good quality products at reasonable prices. The aspirations and
perceptions of the customers have to be given prime importance as the
business is meant for consumers, and their satisfaction should be the
main objective of the business. So, responsibility to consumers means
that we have to set up and maintain the quality and service in addition
to lowering the price tag.
Shareholders' satisfaction – As the organization grows in size, it
is difficult to individually finance the running of the organization. So,
these organizations have shareholders who contribute and invest in the
companies. For this, the management should give a reasonable return
on the money invested by the shareholders, and there should be a
provision to make the shareholders aware of developments and profits
earned so that we can have a satisfied shareholder.

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 SOCIAL OBJECTIVE
Availability of goods – The business organizations should
ensure the supply of products to meet the requirements of the society.
The firm should make a study to know the demand and accordingly the
production and supply of goods should be done. So business
organization should ensure that goods are available in market in order
to meet the demand.
Quality of goods and services – One of the basic
responsibilities of businessmen is to supply quality goods and services
to customers at reasonable prices.
Cooperation with government – The government has fixed
priorities for the execution of policies for the growth and development
of the nation. The businessmen should be reliable to the government
agencies while paying tax dues and other liabilities, by doing so
businessmen cooperate with the government in helping to achieve the
objective of establishing the socialistic pattern of society.
Creating job opportunities – Every business can help the
society by creating new job opportunities. The business expansion will
help the firm in gaining more profits and also employment to the
unemployed.
Natural resources – Efforts should be made by
businessmen to put the insufficient natural resources to the best
possible use. Wastage of any such resource is a loss to the firm and to
the nation.

ORGANIC OBJECTIVES

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 Survival – In case of cutthroat competition, profits become
very low. Organizations tend to operate very carefully, and survival
becomes, in such cases, their crucial objective.
Growth – As the business objective, it tends to merge with
other firms or take over them to gain profits on a large scale and to
attract more customers.
Recognition – The business organizations attain recognition
in society by providing better customer service, increasing market
share, and caring for the environment and society.
STEPS IN MANAGEMENT BY OBJECTIVES PLANNING
Goal setting: The first phase in the MBO process is to define
the organizational objectives. These are determined by the top
management and usually in consultation with other managers. Once
these goals are established, they should be made known to all the
members. In setting objectives, it is necessary to identify "Key-Result
Areas' (KRA).
Manager-Subordinate involvement: After the
organizational goals are defined, the subordinates work with the
managers to determine their individual goals. In this way, everyone gets
involved in goal setting.
Matching goals and resources: Management must ensure
that the subordinates are provided with the necessary tools and
materials to achieve these goals. Allocation of resources should also be
done in consultation with the subordinates.
Implementation of plan: After objectives are established
and resources are allocated, the subordinates can implement the plan.
If any guidance or clarification is required, they can contact their
superiors.

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 Review and appraisal of performance: This step involves a
periodic review of progress between the manager and the
subordinates. Such reviews would determine if the progress is
satisfactory or the subordinate is facing some problems. Performance
appraisals at these reviews should be conducted based on fair and
measurable standards.
ADVANTAGES
1. Develops result-oriented philosophy: MBO is a result-oriented
philosophy. It does not favor management by crisis. Managers are
expected to develop specific individual and group goals, develop
appropriate action plans, properly allocate resources, and establish
control standards. It provides opportunities and motivation to staff to
develop and make positive contribution in achieving the goals of an
Organisation.
2. Formulation of dearer goals: Goal-setting is typically an annual
feature. MBO produces goals that identify desired/expected results.
Goals are made verifiable and measurable, which encourages a high
level of performance. They highlight problem areas, but they are
limited in number. The meeting is of minds between the superior and
the subordinates. Participation encourages commitment. This facilitates
rapid progress of an Organisation. In brief, the formulation of realistic
objectives is to the benefit of MBO.
3. Facilitates objective appraisal: NIBO provides a basis for evaluating a
person's performance since goals are jointly set by superiors and
subordinates. The individual is given adequate freedom to appraise his
activities. Individuals are trained to exercise discipline and self-control.
Management by self-control replaces management by domination in
the MBO process. Appraisal becomes more objective and impartial.

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4. Raises employee morale: Participative decision-making and two-way
Communication encourage the subordinate to communicate freely and
honestly. Participation, clearer goals, and improved communication will
go a long way in improving the morale of employees.
5. Facilitates effective planning: MBO programmes sharpen the
planning process in an Organisation. It compels managers to think of
planning by results. Developing action plans, providing resources for
goal attainment, and discussing and removing obstacles demand
careful planning. In brief, MBO provides better management and better
results.
6. Acts as a motivational force: MBO gives an individual or group the
opportunity to use imagination and creativity to accomplish the
mission. Managers devote time for planning results. Both the appraiser
and the appraise are committed to the same objective. Since MBO aims
at providing clear targets and their order of priority, employees are
motivated.
7. Facilitates effective control: Continuous monitoring is an essential
feature of MBO. This is useful for achieving better results. Actual
performance can be measured against the standards laid down for the
measurement of performance, and deviations are corrected in time. A
clear set of verifiable goals provides an outstanding guarantee for
exercising better control.
8. Facilitates personal leadership: MBO helps individual managers to
develop personal leadership and skills useful for efficient management
of activities of a business unit. Such a manager enjoys better chances to
climb the promotional ladder than a non-MBO type.

LIMITATIONS OF MANAGEMENT BY OBJECTIVES MBO

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 Time-consuming: MBO is a time-consuming process. Objectives,
at all levels of the Organisation, are set carefully after considering
pros and cons which consumes lot of time. The superiors are
required to hold frequent meetings in order to acquaint
subordinates with the new system. The formal, periodic progress
and final review sessions also consume time.
 Reward-punishment approach: MBO is a pressure-oriented
programme. It is based on reward-punishment psychology. It tries
to indiscriminately force improvement on all employees. At times,
it may penalize the people whose performance remains below the
goal. This puts mental pressure on staff. The reward is provided
only for superior performance.
 Increases paperwork: MBO programmes introduce an ocean of
paperwork such as training manuals, newsletters, instruction
booklets, questionnaires, performance data and reports into the
Organisation. Managers need information feedback in order to
know what is going on in the Organisation. The employees are
expected to fill in a number of forms thus increasing paper-work.
In the words of Howell, "MBO effectiveness is inversely related to
the number of MBO forms.
 Creates organizational problems: MBO is far from a panacea for
all organizational problems. Often, MBO creates more problems
than it can solve. An incident of tug-of-war is not uncommon. The
subordinates try to set the lowest possible targets and the
superior the highest. When objectives cannot be restricted in
number, it leads to obscure priorities and creates a sense of fear
among subordinates. Added to this, the programme is used as a
'whip' to control employee performance.
 Develops conflicting objectives: Sometimes, an individual's goal
may come in conflict with those of another, e.g., a marketing
manager's goal for high sales turnover may find no support from
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 the production manager's goal for production with least cost.
Under such circumstances, individuals follow paths that are best in
their own interest but are detrimental to the company.
 Problem of coordination: Considerable difficulties may be
encountered while coordinating objectives of the Organisation
with those of the individual and the department. Managers may
face problems of measuring objectives when the objectives are
not clear and realistic.
 Lacks durability: The first few go-arounds of MBO are motivating.
Later, it tends to become old hat. The marginal benefits often
decrease with each cycle. Moreover, the programme is deceptively
simple. New opportunities are lost because individuals adhere too
rigidly to established goals.
 Problems related to goal-setting: MBO can function successfully
provided measurable objectives are jointly set and it is agreed
upon by all. Problems arise when: (a) verifiable goals are difficult
to set (b) goals are inflexible and rigid (c) goals tend to take
precedence over the people who use it (d) greater emphasis on
quantifiable and easily measurable results instead of important
results and (e) over-emphasis on short-term goals at the cost of
long-term goals.
 Lack of appreciation: Lack of appreciation of MBO is observed at
different levels of the Organisation. This may be due to the failure
of the top management to communicate the philosophy of MBO
to the entire staff and all departments. Similarly, managers may
not delegate adequately to their subordinates, or managers may
not motivate their subordinates properly. This creates new
difficulties in the execution of the MBO programme.
HOW TO MAKE MBO EFFECTIVE?

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 Support From All: In order for MBO to succeed, it should
get support and cooperation from the management. MBO must be
tailored to the executive's style of managing. No MBO programme can
succeed unless it is fully accepted by the managers. The subordinates
should also clearly understand that MBO is the policy of the
Organisation and that they have to offer cooperation to make it
successful. It should be a programme of all and not a programme
imposed on them.
Acceptance Of MBO Programme By Managers: In order to
make the MBO programme successful, it is fundamentally important
that the managers themselves must mentally accept it as a good or
promising programme. Such acceptances will bring about deep
involvement of managers. If managers are forced to accept the NIBO
programme, their involvement will remain superfluous at every stage.
The employees will be at the receiving end. They would mostly accept
the lines of action initiated by the managers.
Training Of Managers: Before the introduction of MBO
programme, the managers should be given adequate training in MBO
philosophy. They must be ina position to integrate the technique with
the basic philosophy of the company. It is important to arrange practice
sessions where performance objectives are evaluated and deviations
are checked. The managers and subordinates are taught to set realistic
goals because they are going to be held responsible for the results.
Organizational Commitment: MBO should not be used as
a decorative piece. It should be based on the active support,
involvement and commitment of managers. MBO presents a
challenging task to managers. They must shift their capabilities from
planning for work to planning for the accomplishment of specific goals.
Koontz rightly observes, "An effective programme of managing by

20
objective must be woven into an entire pattern and style of managing.
It cannot work as a separate technique standing alone."
Allocation of Adequate Time and Resources: A well-
conceived MBO programme requires three to five years of operation
before it provides fruitful results. Managers and subordinates should be
so oriented that they do not look forward to MBO for instant solutions.
Proper time and resources should be allocated, and persons are
properly trained in the philosophy of MBO.
Provision Of Uninterrupted Information Feedback:
Superiors and subordinates should have regular information available
to them as to how well subordinate's goal performance is progressing.
Over and above, regular performance appraisal sessions, counseling
and encouragement to subordinates should be given. Superiors who
compliment and encourage subordinates with pay raises and
promotions provide enough motivation for peak performance.

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BIBLIO-GRAPHY
1. Awasthappa, K. “Human Resource and Personnel Management
”published
by Tata McGraw-Hill publishing company limited, New Dehli.
2. Armstrong, Michael(1988),”A Handbook of Personnel Management
Practice, “Published by Kogan, London.
3. Rensis likert,” The Human Organisation:Its Management
andValue”Mc
GrawHill Book Company, New York.
4. Yoder Dale, “Personnel Management and Industrial Relations”1967.
5. KS Khotari,”Research Methodology.
6. R.K.Sur and Sanjiv Verma,”Organizational Behaviour”.
7. Shashi K Gupta and Rosy Joshi,”Organizational Behaviour”.
WEBSITES:
1. www.google.com
2. www.yahoo.com
3. projects.com
4. http://en.wikipedia.org/wiki
5. http://www.managament help.org/
6. http://recuritment.naukrihub.com./(Project)

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