Is MBO still relevant today?

In today’s working world company goals, however S.M.A.R.T. and agreed with stakeholders, simply do not motivate people. They are an outdated concept, questioned for several years, but then why do companies continue to use them?
 
The answer quite often is: “This is a market standard” or “it has always been done this way”.
The Management By Objectives concept (MBO) was introduced about 70 years ago. At that time it was considered a disruptive approach, as it was shifting the focus from measuring outputs, typical of the assembly line, to measuring the direct value employees can achieve for the company. By the time the MBO was introduced as standard practice across all sectors and organizations, the world went through a shift in mentality from the industrial age to the age of the knowledge economy. The MBO was designed to measure individual performance in the industrial age, but not in the age of knowledge. In this era, in fact, it is practically impossible to measure individual performance with the same logic.
 
In the age of knowledge, performance is always a team and never individual. It is not possible to measure the performance of a single person in a complex and interconnected world like ours. Therefore, it may make sense to use MBO, but only to measure the performance of an entire team or multiple teams, since everything is interdependent.
 
There is also another very important issue to consider with the MBO mechanism, and it is linked to the motivational aspect. Let’s consider most middle management who usually have variable pay as a percentage of their base salary. If companies do not recognize the MBO at the end of the year, it certainly generates demotivation, since it would be perceived as an injustice and would reduce attachment to the company. But the opposite is not true: even if they are assigned and then recognized, no real motivation is generated.
 
Why shouldn’t an award push employees to do things better? For two main reasons.
 

1. The first concerns the annual MBO cycle – the year that passes from when the objectives are set to when they are evaluated. The MBO is often forgotten by the people who should pursue it. This can happen because people are busy with their daily lives and have difficulty remembering the goals set at the beginning of the year. A solution to this problem could be to discuss the goals weekly so that they become more relevant to those who have to pursue them. But in this case, it is practice, not money, that turns goals into relevance.

2. The second reason is in the nature of the motivation, which can be purely material motivation, social recognition, or intrinsic motivation. The MBO is mainly based on the first and second types (the carrot and stick concept). However, it is the third type of motivation or the taste of building something for the pleasure of doing it, that really makes the difference. It is this, rather than “making money”, that motivates entrepreneurs, especially at the beginning of their journey. Intrinsic motivation is the one that really works, not that linked to external awards or recognitions. MBO systems inherited from the industrial age, prevent people from following their needs, passions and desires.

 
Let’s turn the theory into practice and look at the following example – You are recruiting an extraordinary talent and want to choose a compensation method that can motivate him/her to work hard, go the extra mile, and stay with the company for years. You are considering the following options:

1. Pay an annual salary of €300,000.
2. Pay an annual salary of €270,000 plus a €30,000 bonus based on results.
3. Pay an annual salary of €250,000 plus a 20% bonus based on results.

I believe I can predict your choice!