One of the most common questions we get asked as leadership team coaches is how Objectives and Key Results (OKRs) should be used to determine salary, compensation, or bonuses. A growing number of organizations are eliminating the annual performance review altogether, but a need still remains for an OKR process involving metrics and KPIs to exist in order to determine compensation and promotions. Or does it?

First, let’s distinguish the two kinds of OKRs we are speaking about here. The one popularized by Google is where OKRs represent stretch goals for an organization, a team or individual should hit 60-70% of the target, with the intention of rewarding courage, innovation, and ambition (vs mere execution). The other is configured for performance milestones to hit a target of 100% in completion.

We will be discussing the first option here as it is the OKR process we normally encounter and recommend for clients. It is also the methodology where a coupling of OKRs to compensation can quickly become counter-productive, if not done right. However, much of what we share will also apply as solid practices for any goal setting or OKR process.

It’s not just about completing the OKR for the sake of the review

You’ve likely already heard that OKRs should not be tightly coupled with employees evaluation and compensation. The biggest reason for this is that your team will stop “shooting for the moon”. More precisely, tightly coupling the OKR and review will lead to overstated accomplishments, stunted innovation, and sand-bagging of goals.

Coupling OKRs with pay leads to overstated accomplishments and stunted innovation.

How come? Because OKR goals in this context work best when they stretch and push your people to become ambitious and self-driven. In other words, the OKR process work best when individuals and teams follow strong intrinsically motivating factors like autonomy, belonging, mastery, and taking on new challenges that inspire them.

Once compensation or promotion enters the picture, motivations shift towards far less effective extrinsic goals, which means the behavior can skew towards looking good or laying the fault on others for any failures. So status, money, or self-preservation are now running the show.

We’ve seen this again and again, going back to our days working in HR departments at large corporations when people play politics or try and game the system to meet targets and overall employee performance can actually drop.

Instead, we suggest the following practices for using OKRs in a review:

Make OKRs just one of the factors influencing compensation. When determining employee compensation, it is absolutely ok and perhaps even valuable to take into account the ambition of OKR goals and the success of results. However, it is also important to use OKRs as just one of the many data points available that influences these performance evaluations.

Look at other work operations and overall behaviors. If you do decide to link OKRs with reviews – as many sales teams find useful, for example – make sure other operational goals and behaviors are a large part of the picture.

In instances where OKRs represent stretch goals, any individual or team is also going to have a lot of other important daily tasks and conversations that may or may not be directly reflected within the OKR process. Examples of these are progress in career growth and skills, contributions above and beyond job expectations, working collaboratively with others to drive total business revenue, and embracing the organizational culture and values.

For example, a manager may need to have 20 client interviews per quarter as part of their expected operational tasks, which is not covered by their OKR. But even if their supervisor measured this, an OKR review still wouldn’t reveal everything meaningful about the employee’s performance and growth. All these factors should matter a great deal in choosing how to reward an employee beyond their base income:

How are they doing these interviews? Do they go above and beyond in the expected quality of operations in them? Did they take on additional work? What is their attitude and level of professionalism? Do they consistently practice and model the company’s values?

Embrace collaboration over competition in OKR-related compensation. Consider offering the same bonus to a whole organization or team as a reward for meeting ambitious OKR goals. While individual rankings might have value in determining who to promote, giving bonuses to a whole team encourages greater collaboration, cooperation, and alignment in everyone in the team to drive results within your organization.

Compensation and the OKR Process

On the other hand, individualized compensation within a team for OKR goals can lead to internal competition within the team, with the ensuing politics, more rigid hierarchies, and unhealthy one-upmanship. Some organizations worry about social loafing factors if one or more individuals are not carrying their weight, and unfairly rewarding people by paying a whole group the same compensation for OKR results.

The roots of this potential issue are much better addressed through:

• Clearer agreements around work expectations for everyone on the team
• Mutual accountability processes where group members call out one another for not meeting their agreements or pulling their own weight in meeting a goal
• Peer-level feedback review sessions that can factor into determining promotions or salary raises for individuals

Here are some additional practices for streamlining your OKR process:

Have a gap between the two conversations. Development and financial reward should never be conflated, so be sure to separate your OKR review conversations from all employee evaluation and compensation conversations.

In Work Rules!, Laszlo Bock suggests making this separation at least one month apart to decouple the two processes in the minds of your employees. By taking away concerns around salary, ranking, or status in the OKR review process, you will free up your employees to become creative and step into a learner’s mindset. Contrast this with reactivity, manipulation, or defensiveness that may otherwise arise around meeting their goals.

Stay away from formulas. Fortunately, formulas for calculating compensation are not common these days, but we still hear about organizations attempting them. The belief that they can be effective goes back to the earliest days of the industrial era when productivity formulas became en vogue and have grown significantly more complex with time. The logic goes that if one can accurately measure employee productivity, then compensation should follow accordingly.

However, that’s not how it works. Formulas often fail to reward the highest performers, even if they include productivity metrics or OKRs. How come? Because attitude, professionalism, and the little daily contributions an employee makes have a large snowball effect that goes way beyond what any formula can capture or account for. Only a managerial and/or peer review process will reveal these important subjective factors.

Time intensive as they can be, there is no substitute for having these meaningful conversations to track and rate these crucial qualities. A common and successful approach that we have used, supported, and have seen work many times is manager-level calibration conversations about employees with the same standards applied transparently across the board. It is a much more fair and accurate process in evaluating the value of employee contributions.

Never use OKRs to determine base salary. This may sound obvious, but we continue to be surprised to hear people attempting this. Start with local market standards to actually determine base salary.

Accept that successful compensation processes are always subjective. This will no doubt irk some people, but it is perhaps the most important consideration. Even the most “objective” OKR metrics review process will not alleviate the inherent subjectivity of compensation, although the suggestions we have made here will ensure it far more fair and transparent. We have not seen any exceptions to this rule yet.

So can OKRs be part of a compensation and reward process? Certainly, and with all the guidelines and caveats shared above, they can actually help (rather than undermine) your employee motivation efforts.

Can OKRs be part of a compensation and reward process?

Watch out for biases in an OKR review

When managers get together to discuss individual employee evaluation and compensation in a calibration session, be sure to have a checklist to call each other out on any implicit biases, errors, or blind-spots that compromise fairness or consistency in evaluations. We’ve seen these biases creep into many calibration scenarios unless they are specifically looked for.

Here are the most common examples of bias:

• Central Tendency – all employees are being rated about average (or above average if you live in the town of Lake Wobegon!).
• Leniency/Strictness bias – the appraiser tends to give all employees unusually high or unusually low ratings.
• Similar-to-Me bias – the appraiser inflates an employee evaluation because of a personal connection or identification with them, rather than objectively looking at their actual performance.
• Halo/Horns bias – An appraiser’s evaluation of an employee’s performance is biased/skewed because of the appraiser’s current judgment of the employee as being good (halo) or bad (horns), while ignoring new evidence to the contrary during the time period.
• Recency bias – an appraisal is based mostly on an employee’s most recent or memorable behavior, rather than on their behavior throughout the appraisal period.
• Contrast bias – an employee evaluation becomes skewed up or down from comparison with the employee that has just been evaluated before them.

We have personally seen many successful examples of goal setting and compensation processes that work really well together. Find and customize yours based on the OKR process in place, in addition to the needs, priorities, and culture of your organization and set your people up to performing as their best-selves at work. Please reach out to us if you have questions or would like more support with this process.