Organizational Equity and Incentive Systems: Why Individual MBOs Lead to Performance Loss

In a modern organization, organizational equity and incentive systems ​​are critical factors in supporting ​​high performance, cross-functional collaboration, and ​​the ​​retention of key personnel. ​​When Management by Objectives (MBO) systems focus solely on individual goals, ​​structural contradictions emerge ​​that can undermine employee trust, slow down improvement processes, and generate hidden costs due to inefficiencies and turnover.

In this article, we explore why incentive systems must consider the ​​interdependencies between roles and functions, how organizational justice theory supports this approach, and what it means to translate these concepts into ​​concrete managerial practices ​​for entrepreneurs, HR, and line managers. ​​The result is not only greater operational efficiency, but also a culture that values human potential and supports sustainable results.

A book could be written about objective and reward systems, also known as MBO – Management by Objectives. In fact, many have been written, with varying degrees of ​​psychological authority – by which I mean scientific authority.
Whenever I face this challenge, my main effort is to thoroughly study the interdependencies of objectives among people and functions. This ensures that everyone who plays a role – even if marginal but necessary – in achieving that objective has it included in their KPIs.

I want to clarify my position: ​​the problem isn’t with MBO systems themselves, but with using MBOs that focus solely on individual goals. In a complex environment like an organization, goals are inherently interdependent, linking people and functions.

In the book ​​The Toyota Way, Jeffrey Liker ​​shares an anecdote that opened my eyes to the short-sightedness of certain ​​American-inspired MBO systems.
The episode dates to the 1980s, but I still see examples of it today, so it remains very relevant.

There is no bad faith or incompetence, just an incentive system that is correct in form, but short-sighted in substance. Segregation of duty, they call it the sophisticated ones: separation of responsibilities.
But can we make this discrimination between what is my job and what is your job if the result produced by the two tasks is distinct in turn?
In the case of Toyota plant seals and the raw materials cited in the Toyota Way anecdote, the result “on-time and reliable supplies at the best price” is the result of the contributions of multiple people, the result of a compromise that requires different skills; therefore, it is impossible to separate responsibilities; for this reason, similar objectives must be set for technologists, purchasing, logistics, and production.

And this is where the theme of equity ceases to have ethical connotation and becomes a question of effectiveness, of organizational functioning. If you reward a person with a timely outcome that generates costs elsewhere, you are building an incentive that undermines collaboration between people at its core. A concept as simple as it is often overlooked, according to my personal observations in the field.

In the early 1960s, social psychologist John Stacey Adams, who worked for General Electric’s research center (not exactly a nonprofit, that’s it!), tried to systematically explain an important question for organizations: why do competent, well-paid, and seemingly treated “well” people stop engaging?
(see Adams, J.S. (1965) Inequity in Social Exchange. Advances in Experimental Social Psychology, 2, 267-299.)

Adams’s theory is as follows: We humans do not value what we receive in absolute value, but in the ratio of what we give to what we get, continually comparing it to the ratio of what others give and get in turn. Effort, time, skills, emotional burden on the one hand; salary, recognition, opportunities on the other.

It is a constant, often automatic, rarely declared comparison.
When this ratio is perceived as balanced, energy continues to flow into the system.
When it appears unbalanced, people look for a way to rebalance.
They can reduce their commitment, stiffen, defend their territory, or get out of the game. Not out of cynicism, but to re-establish a symmetry they feel violated.

This theoretical approach –Adams’s Equity Theory– gave rise, in the following years, to a very broad line of research on organizational justice, which distinguishes between distributive justice, that is, how resources and rewards are distributed, and procedural justice, that is, how decisions are made.

Lean describes three categories of waste:

• muda (the defects, the expectations, the overproduction, the excess of quality)
• muri (overloads)
• mura (irregularities, the variability of the results of a process)

We can consider iniquity an irregularity that often generates overloads. A waste squared, I’d say!
It also generates conflict, envy, antipathy, gossip and thus accelerates the entropy of the system.
When people smell it, they start protecting themselves rather than contributing.

Employees may commit to a peak in work to keep the job going, but this discretionary and voluntary effort must be part of a system perceived as fair, that is, where this peak has sometimes reached everyone a little’ or in any case in proportion to the level of responsibility of the role.
Perceived, not fair at all!

Whether or not to manage the load and overload of people, or of some people compared to others, makes overload sustainable.
Just like an overloaded machine that first vibrates, then loses precision, and finally stops, an organization that makes people work in conditions of inequity builds up tensions and weakens structurally. The indicators to be monitored are:

• absenteeism (people who stay home at the first excuse),
• turnover (people who change the air),
• burnout (people bursting)
• and quiet quitting (people who silently retire and stop volunteering, doing the bare minimum).

Italy, unfortunately, is not attractive – despite all the rhetoric of politics: in the last 14 years, 45 thousand young people between the ages of 18 and 34 have gone abroad every year. The figure is growing: almost 80,000 in 2024, equal to 21% births in the same year.

Proportionately, for every 10 children born each year there would be 2 young people leaving, one of them graduates. And this is happening in the country with the fewest graduates in Europe, ahead only of Romania.

(But I’ll stop because otherwise I’ll get depressed too for myself and my children.)

Among the motivations of those who go, in addition to economic ones, is precisely the possibility of seeing their value recognized. (see the first CNEL Report 2025 “Italy’s attractiveness for young people in advanced countries”).

In our home, inequity is often a byproduct of informal, (not to say haphazard, opaque) management: implicit criteria for assigning roles, career paths established based on relationships rather than clear criteria, and decisions influenced by internal lobbies.
All of this generates perceptions of injustice that quickly translate into mistrust, resistance, and, in the worst cases, voluntary turnover.
Our system tends to value personal relationships over objective criteria, and this weakens organizational justice.