09.29.2021

Should You Connect OKRs and Compensation? (Spoiler Alert: No)

With salary and bonuses, what you reward is also what you reinforce

balancing money and time with OKRs

In your exploration of OKRs, you have likely encountered the idea that OKRs and compensation should always be kept separate. You may also have wondered why and how, exactly, that might work. We sat down with Ryan Panchadsaram, What Matters co-founder and head coach, to explore why this separation is important and how it plays out in practice.

“Some of the biggest things we’ve got to do in life, we’ve got to do together,” observes Panchadsaram,” who points to sandbagging, unintended consequences, and negative impacts on culture as reasons to avoid connecting OKRs to compensation. One is sandbagging, when people deliberately aim low to ensure they meet their goals and claim their salary increases or incentives. “You don’t want to penalize people for aiming high,” he says. Rewarding an individual goal vs. collective goals financially can also lead to a culture of sharp elbows. “You can have a very OKR-oriented company, be blowing metrics through the roof—and create a culture where people ensure their own products or projects succeed, even if it’s at the expense of others. Suddenly, instead of all trying to row together, it’s everyone for themselves.”

Laszlo Bock, Senior Vice President of People Operations at Google from 2006 to 2016 and founder of Humu, previously shared with What Matters the unintended consequences he has seen crop up around sales incentives. “If the goal is pure revenue achievement, people might push for volume even if there are no profits,” he told us. “Or they could prioritize enterprise contracts that might actually lose money over the long run.”

There are, of course, infamous examples of goals tied to compensation gone hugely awry, such as VW’s intentional generation of false emissions data or the fraudulent practices of Wells Fargo employees desperate to meet sales quotas.

Keep salary decisions separate from OKRs

If you don’t tie salary decisions to goals, how else do you measure which employees are deserving of an increase? What do you talk about during an annual performance review if not goals? Panchadsaram recommends focusing performance reviews and salary decisions on skills, responsibilities, and output rather than on OKRs.

This means starting with job descriptions that clearly outline skills and responsibilities for each position and level so that it is clear how employees move from one band to another, from Jr. Engineer to Sr. Engineer, for example. “The performance review is about evaluating how good someone is at the full scope of work that they do,” says Panchadsaram. Do they fulfill their job responsibilities, or have they expanded beyond the scope of the position? Do they meet the skill level required, or have their skills grown toward the next opportunity? What skills do they need to strengthen in order to move forward? What was the quantity and quality of their output?

“All of this can be measured independent of OKRs—and should be,” he says. “It’s possible to meet goals and still underperform in your role, just as it’s possible to fall short of a stretch goal, but actually be really good at your job.”

The cadence of OKR check-ins and performance reviews differs as well. Performance review conversations tend to be annual, while conversations about OKRs (known as CFRs for Conversations, Feedback, and Recognition) can happen as frequently as every week. This offers the opportunity to celebrate progress, change course, and facilitate learning in real time.

While salary decisions should be kept out of OKR conversations, there can be some overlap in discussing OKRs in a performance review setting. In fact, John Doerr in Measure What Matters notes that as a reflection of an individual’s most meaningful work, OKRs can provide important feedback for the review cycle and even be an antidote to ratings bias. Where a traditional viewpoint may have shown a direct line between goals and evaluation, Doerr has added CFRs as a critical component, showing that OKRs, performance reviews, and CFRs share some overlap, with all three needed to fully inspire and evaluate employees.

Inspire teams with OKRs; Incentivize collaboration with bonuses

It’s one thing to keep salary separate from goals, but some would argue that tying bonuses to OKRs is logical. After all, incentives can be a powerful way to motivate. But while Panchadsaram believes bonuses may play a role in attracting good employees, he sees limited value in retention. ”Depending upon your region or industry, a bonus is often ‘expected,’” he says, “which diminishes its value as a driver of performance. And if things aren’t going well, they’re the first thing to get cut. How do you motivate people then?”

Panchadsaram adds, “We subscribe to the idea that you hire good people, pay them well, and set good goals—team goals, because OKRs are collective commitments. A missed KR signals a misfire in the overall plan and presents an opportunity for course correction, not for judgement or punishment of one person.” He recommends that your criteria for bonuses be weighted towards the output and outcomes of the team rather than the individual. In short, you want to reward people moving the organization powerfully forward—together. Says Panchadsaram, “That’s what leads to a high performance culture.”

Panchadsaram believes incentives tied to OKRs can send confusing or erroneous signals about job performance. “You can have an incredible team member or team demonstrating high-level skill and delivering on responsibilities and still missing an OKR for reasons completely beyond their control. For example, a company’s legal team could set an Objective to streamline their contracting process, but fail to deliver because the company closed on an acquisition, requiring round-the-clock-work by the entire legal team.

Similarly, it’s also possible for an employee to contribute to successful OKRs but still merit a poor performance review. “You might have a team leader who brings in more sales than were projected, but achieves this by being a poor or overly-controlling manager,” says Panchadsaram.

In situations where individual goals and incentives are standard, such as for salespeople, Laszlo Bock recommends adding OKRs that encourage constructive behavior or “organizational citizenship.” These include things like interviewing, recruiting, and coaching. Says Bock, “Key results would then be things like ‘conducts at least five interviews’ or ‘improves diversity on our team by at least two percentage points.’”

Panchadsaram says that extraordinary work begins with well articulated goals that clarify vision and drive purpose. If you are inspiring and activating teams with OKRs, he says, “Align your compensation mechanisms with what you value—because that’s what you’ll get.”

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