OKR vs MBO: Differences and similarities
Anyone who works with OKRs has probably also heard of MBO – or vice versa. After all, both OKR and MBO are management methods based on similar thoughts. Yet they cannot be much more different.
This article on OKR and MBO answers the following questions:
- What is MBO (Management by Objectives)?
- What is OKR (Objectives and Key Results)?
- What are the differences and similarities when comparing MBO vs OKR?
- What are examples of MBO vs OKR?
Plus, there is an MBO vs OKR infographic at the end of this article.
What is MBO?
Definition MBO
MBO stands for "Management by Objectives." The MBO method was developed in the 1950s by US economist Peter Drucker to improve organizational performance. Drucker is considered a pioneer of modern management theory.
MBO essentially describes a goal-setting process in which top management sets the organization's goals - usually for the next year. All managers then set the goals for the employees under them. However, employees are free to choose how they meet their targets. In the MBO system, goals are typically expected to be achieved at 100%, so an employee's performance appraisal, bonuses, and higher compensation are often tied to the achievement of his or her goals.
How does the MBO process work? The first step in the MBO process is for individual departments to formulate goals that support the overall corporate objectives. As part of the MBO process, managers decide what individual contribution an employee should make.
What is OKR?
What is OKR?
OKR stands for "Objectives and Key Results" and is a modern method for goal and people management. One of the key advantages of the method is the linking of qualitative goals (Objectives) with two to four quantitative goals (Key Results) each. In this way, OKRs enable a company to translate its vision and strategy into measurable goals that are more tangible for employees. OKRs are typically set every quarter in order to be able to react quickly to changes.
To learn more about the benefits, process and history of OKRs, check out our OKR Guide. To learn what OKRs can look like in real life, visit our collection of OKR examples.
OKR vs MBO: Overview
Despite common roots of OKR and MBO, there are a number of differences between the two goal management systems.
In his book High Output Management, former Intel CEO Andy Grove identifies two questions that need to be answered when implementing systems with common goals:
- Where do I want to go? The answer to this corresponds to the objective.
- How can I determine if I am achieving my Objective? The answer to this provides the corresponding key results.
While MBO usually only addresses the first part (the what), OKRs also consider the how through the key results.
On a closer look, some differences between MBO vs. OKR become apparent:
MBO | OKR |
|---|---|
Management by Objectives | Objectives and Key Results |
What should be achieved? | What should be achieved and how? |
Top-down goal setting | Top-down & bottom-up goal setting |
Cycle duration: 1 year | Cycle duration: 3-4 months |
Goals are individual and confidential | Goals are team-based and public |
Goals are mostly conservative ( as they are linked to bonuses) | Goals are mostly ambitious |
100% goal achievement intended | Healthy culture of failure: failing is seen as part of the learning process; target range usually between 60 and 100% |
OKR vs. MBO: bottom-up or top-down?
One difference of MBO vs. OKR is revealed in the nature of the objective. MBO is about the traditional art of management, i.e. planning, steering and controlling.
As a result, in companies managed with MBO, objectives are cascaded from top to bottom (top-down). Also, MBO goals are set once per cycle (typically one year) by the leadership, which are then passed on to the employees. During this time, the employees only have to work towards achieving the goals. There is usually no say in the setting of goals.
According to the MBO philosophy, the world is therefore considered to be sufficiently predictable, so that goals can be set a year in advance, which are then only presented to the employees with the request that they achieve them.
The OKR approach, on the other hand, respects the reality of our complex environment: it is rarely predictable, dynamic, and characterized by ambiguity (VUCA). With OKR, management determines the overall goals of the company - but the goals of the teams and departments are largely determined by the employees in a bottom-up approach. The teams can therefore react to changes in the market on their own initiative, self-organized and autonomous.
OKR vs. MBO: Performance appraisal and management
Another major difference is the way in which employees are appraised. MBO focuses on motivating employees through extrinsic incentives. These incentives usually take the form of salary increases as part of the performance appraisal, as well as bonuses that are paid out when a goal has been achieved.
The problem with this is that the idea can manifest itself among employees that motivation must always arise from a monetary or material incentive. As a result, the inner drive to perform well because one is striving for something greater can atrophy.
With the OKR method, on the other hand, the degree of achievement of key results is not linked to compensation. This would be contrary to the OKR idea: motivation through ownership and self-organization.
Through this decoupling, employees are free to approach their tasks creatively and to experiment, because they do not have to fear missing bonus payments or negative performance evaluations. This creates a healthy culture of failure, in which failing is seen as part of the learning process.
OKR vs. MBO: Aspiration or control?
Rigidly coupling compensation to goals has another disadvantage besides crippling intrinsic motivation:
MBO goals are set conservatively. This is a logical consequence of the coupling: employees only set their goals high enough to be sure that they will achieve them. After all, this is the only way they will receive their salary increases and bonuses. Goals are therefore set artificially low as a result of this incentive, which can have serious consequences for the organizational performance.
On the other hand, OKR incentivizes setting ambitious goals by clearly separating compensation. While MBO goals are expected to be met 100% of the time, in OKRs, even a goal achievement of 60-70% is often cause for celebration.
OKR vs. MBO: Openness or confidentiality?
In MBO-led companies, usually only the executives and the responsible employees have insight into the respective objectives. Transparency is not an option here, as it is a confidential agreement between superiors and employees.
This creates two crucial problems: information silos and, as a result, lack of communication and collaboration.
With clear objectives and an annual time horizon, employees have a clear set of tasks in front of them that won't change much. Communication and coordination with other team members or departments is only necessary in rare cases. On the other hand, OKRs have transparent, public team goals and a high need for coordination. While MBOs have employees comparatively "in isolation," OKRs create a fireworks of communication and collaboration to jointly drive initiatives and goals. Silos are broken down, synergies can be identified, and duplication of work can be avoided.
MBO examples vs. OKR examples
To illustrate the difference between OKR and MBO in practice, here are some examples of company goals and marketing goals:
Company MBO examples
- Achieve NPS of at least 45
- Increase CSAT score to at least 75%
- Reduce employee turnover by 10%
Company OKR examples
Marketing MBO examples
- Increase the monthly visitors to the website from 30k to 50k
- Increase social referral traffic by 40%
- Achieve 60% SOV (Share of Voice) vs. main competitor
Marketing OKR examples
Conclusion and MBO vs OKR Infographic
The comparison of OKR vs MBO has made clear that the OKR method is much more compatible with our complex world than MBO. And not only the challenges of our environment, but also the needs of employees for more autonomy, ownership and purpose are better addressed by OKR than by MBO.
Ultimately, it is a question of the philosophy and identity of the organization: MBO stands for stability, control and rigid structures. OKR, on the other hand, stands for flexibility, effective collaboration, creativity, and agility and is thus better adapted to the reality of the modern working world than MBO.
