Historically, corporations used the goal setting for two primary purposes:
No wonder that many companies that adopted Objectives and Key Results goal management methodology try to use OKRs to evaluate employee compensation.
In this article, we'll explore why this is a bad idea for OKRs, and what you should do instead.
One friend of mine developed her recipe for success after working for a few years in the corporation. She concluded that to be successful, it doesn't matter how much you contribute. All that matters is how it seems you contribute. "In the beginning, I was setting aggressive goals and was working very hard to achieve them. And at the end, I was written off by my manager for missing some of my targets. And didn't get the bonus. Now I set as small targets as possible, complete them fast, and spend the rest of the time for myself. The most important is that everyone seems to be happy, and I get my bonus every time" — she shares.
Let's be honest, we all saw such behavior at some point in our careers. And this is what happens when you evaluate performance based on the completion of the goals.
Salary based on OKRs leads to understated targets and overstated accomplishments. It's an expected and logical outcome because of the incentives it creates. I doubt you'd like to create such a culture in your organization.
Below are the main problems that appear if you try to link OKRs and performance reviews tightly and tips on how to avoid them.
Originally, Objectives are designed to be aspirational. Team members are encouraged to set stretch goals that are beyond what they think is achievable. And seek for creative solutions to try to achieve such targets. Of course, most of the time team members would miss several such targets. And if they would be punished for it, the next time teams would set lower goals they know they'd hit. And the next time — even lower, to reduce the risks.
Eventually, you'd end up with the list of trivial tasks for OKRs, that everyone uses only to get their salary and bonus, and nothing else.
Note: we're talking here about the Google-style moonshot Objectives, the one that is ok if achieved by 70%-80%. If your team uses rooftop Objectives (the one that the team expects to hit 100%), the closely connected performance reviews might work a little better in such case. But in the long run, it would also end up with the understated targets. Even with the rooftop-style goals, we still don't recommend to connect OKRs and compensation closely.
As a consequence of the previous problem, when team members start to lower their targets, they still need to present themselves are high-achievers and justify their contribution to the organization. And such teams would overstate their impact on the organization. You'll get the culture of "pretending to contribute higher than it is in reality." And for people that play such games, it takes mental effort and energy, thus leaving them less focus to do the work.
When employees are evaluated only based on % of accomplishment of their goals, they don't have incentives to help other team members or other teams. Such an approach creates the culture of individualism, or the tribe of the 3rd level, as Dave Logan mentioned in the book "Tribal Leadership."
Instead of having the OKRs and performance reviews tightly coupled, separate them as much as possible. OKR cycles and salary review cycles should have different cadence. Laszlo Bock, in his book "Work Rules!" suggests making at least 1-month gap between OKR review and performance reviews. By creating this gap, you'd allow your employees to focus on development, contribution, and collaboration during the OKR meetings, and take away salary and status concerns.
Of course, you cannot separate OKRs from Performance Reviews completely. Moreover, we believe that you SHOULD take OKRs into account during the employee performance reviews. However, make it only one of the sources to evaluate the performance, and by far not the main one. And take into account many other factors when evaluation OKR completion score:
No formulas can take into account all the factors that determine the contribution of each team member. Moreover, even if you could create such a method, it would become outdated in a few months. Don't waste time and effort trying to develop such formulas, and rely more on the peer and manager feedback for evaluating performance.
Note: some organizations use formula-based compensation, such as Buffer, but it's an exception rather than a rule, and we still don't recommend using it.
It is one of the common complaints that we hear when we suggest that OKRs and Reviews should be separated.
On paper, the formula such as Salary = f (salary base * % of goals achieved) might seem objective, but in reality, it is not. It depends on the highly subjective notion of how difficult the original targets were. Such formula also depends on the negotiating skills of employees to reduce their goals.
Overall, it's almost impossible to create an objective performance review process. It always will be highly subjective. Just accept it.
Our tip is to make the performance review process transparent. It would build trust in your team that nothing is hidden, and would make employees feel like the process is more objective and trustworthy.
Check out Google compensation process in the book "Work Rules!" for inspiration to develop your own.
There are some areas where the compensation is defined as % from the employee performance (ex. closed sales deals or recruiting bonuses). In such cases, we recommend tracking such metrics (KPIs) separately from OKRs and using them to define the compensations.
If you focus only on the team-level Objectives and avoid individual OKRs, you'd most likely not have these metrics among Key Results anyway.
In the end, the only thing you need is to avoid the system that incentivizes employees to negotiate lower targets for the sake of a higher bonus or salary.
OKRs and performance reviews serve different purposes, and should not be coupled tightly together. OKRs motivate teams to achieve ambitious goals, align, engage, and encourage collaboration. Mixing OKRs with performance reviews would degrade these OKR benefits.
Develop your performance review process wisely. Don't accidentally incentivize your teammates to reduce targets.
Check out a free OKR tool Plai that is designed to help your organization focus only on the team-level goals and not mix performance reviews with OKRs.