This paper describes management by objectives (MBO) as an approach by which organisations can be managed, with particular reference to health care institutions. An evaluation of MBO is presented and the disadvantages of MBO are discussed. A more comprehensive performance management system than MBO is advocated. The experience of St Vincent's Hospital, Sydney, in designing and implementing a goal-directed performance management program which builds on MBO methodology, is described. This experience provides guidelines by which senior managers may successfully implement goal-directed performance management programs in health care institutions in order to enhance organisational effectiveness and the goal-oriented behaviour of managers.