Yay or Nay: Should OKRs Drive Performance Incentives?

September 21, 20186 min read

This is a question that I constantly get asked by my former Human Resources colleagues. It seems logical to link performance (and pay, reward, promotion) to your Objectives and Key Results (OKRs) process. 

That is, until you put it into practice and watch human behavior unravel itself in front of your very eyes.

OKRs should factor in but be de-coupled from incentive structures.

Many OKRs experts warn that when you link extrinsic rewards directly to an organizational efficiency system, you may discover the ‘Law of Unintended Consequences’ kicking in.

At best, some unsavory behaviors involving ‘sand-bagging’ or manipulation of result outcomes rears its head and spoils the effectiveness of a great company performance measurement system. This is especially true when self-reported, manual updates are used to track progress.

Let’s assume, for the moment, that OKRs should be definitively de-coupled from all employee incentive systems.

This isn’t to say that OKR performance shouldn’t factor into how we assess individual performance. Clearly, OKRs a measure of how people achieve goals and contribute to a team or company’s success.  

But let’s unpack this a bit to clarify why I may be suggesting this and how managers should approach individual performance management in an OKRs context.

Step 1: The basics of excellent individual performance management.

Individual Performance Management is measuring people against a set of criteria where we’ve clearly set expectations for them, and ensured our people know if they’ve had a ‘good day’ or a ‘bad day.’ Then either celebrating (reinforcing) or course-correcting (up-skilling or re-skilling) them so they can continue having ‘better days’ moving forward.

It starts with setting the baseline to clearly and accurately communicate someone’s role in terms of accountability, responsibilities, skills, experience and knowledge they must have minimally to perform to their manager’s satisfaction, which is hopefully a standard across the company.

This should initially be well articulated in a carefully constructed job description. This means being sure that we are setting people up for clarity on what we expect them to know and do, and how we expect them to behave, engage and perform in their roles.

This is often specific to the role itself and contains all the basic information about job title, reporting line, job family, specific responsibilities and accountabilities, what level of experience, skill and knowledge they need to have. It may further contain things like salary banding or remuneration (reward) components they are placed within and eligibility for other pay plan components like company or individual performance bonuses, commission plans, etc.

A key trick here is to outline the typical tasks that are required for the role to succeed in supporting business-as-usual activities, as well as special project work they are likely to be involved with from time-to-time.

That covers of the individual’s role. This will cover the largest percentage basis of the overall performance measurement in determining if they’re performing, and the level of performance they’re achieving.  A good rule of thumb is to weight this element between 50% – 60% overall. 

Step 2: Incorporating functional performance standards.

The second area of performance management considers what functional role they are performing: individual contributor, people manager, functional leader. Here, it is critical that we outline what behaviors we’re going to measure them against, in addition to their job description such as Google’s Project Oxygen :

  • Being a good coach
  • Empowering the team and does not micro-manage
  • Creating an inclusive team environment, showing concern for success and well-being
  • Is productive and results oriented
  • Is a good communicator – listens and shares information
  • Supports career development and discusses performance
  • Has a clear vision and strategy for the team
  • Has key technical skills to help advise the team
  • Collaborates across the company
  • Is a strong decision-maker

You need to think about how to rate, rank and scale the above elements to ensure everyone has a clear understanding as to what under-performing, performing adequately and exceeding performance standards looks like.

You can base this both on how they are rated via 360 reviews – by both their manager and their reports.  As management and leadership is so important to the company’s success – weighting for this element should be 20% – 30%. 

Step 3: Measure and manage how your employees live your core company values.

The third and final aspect of performance management is a baseline set of core behaviors that you want every employee to embrace. These are often underscored by a core set of values that your company embraces as central to how people work, engage with one another, make decisions, solve challenges, raise issues, collaborate across the company, contribute to the common good, etc.

An example of how this is best framed and used comes from Netflix’s Freedom and Responsibility values matrix (slides 10-18). It’s just as an example, but a very good and mature one that grew over years of trial and error, so that it is well tested. It outlines how core values underpin and inform every behavior and decision that human beings make there and provides a basis for then assessing people against the use of those values in everyday interactions.

You may already have a set of core values from which you can draw a behavioral assessment. If not, we can create something simple that should be agreeable to all.  Weighting the evidence shown by employees in ‘living the values’ is often around 10% of the overall performance score.  It doesn’t make it less important – but rather reminds everyone that that precious 10% of their score keeps focus on this a core to what the company values in its people.

The matrix of performance management excellence.

An individual performance assessment matrix, which I think all staff and managers should revisit every quarter, should examine:

  1. Performance within specific role
  2. Performance within their functional role
  3. And performance incorporating core values

Feedback on a daily/weekly basis from a manager/coach should be based on all three of these elements. Succinct logs should be kept and aggregated, along with learning interventions, for those quarterly discussions.

Quarterly discussions should be mostly about performance, but should also capture an individual’s career aspirations, project portfolio activity, sense of forward progress and personal growth, and any particular challenges they are facing, feeling or working through.

Activities that can inform the above elements would include progress against OKRs, project sprint activity, special projects and BAU activities. 

Additionally, all employees should, be assessed on the basis of the core values that your company feels are critical in daily behavior in maintaining cultural norms.

OKRs power organizations and employee experience powers people.

A solid performance assessment regime should accomplish two things very well.

Firstly , it should give the organization a clear picture as to how an employee is behaving across all aspects of their daily role, near and longer-term project activity and as citizens of their corporate community.

Secondly , it should provide as much actionable insight as possible for that employee to know how they can improve, grow, expand and achieve within their company environment – and lay a clear path ahead that spells out how the right actions, behaviors and performance can lead to rewards, enhanced responsibility, personal and professional growth.

OKRs are a proven system to enhance organizational efficiency and performance but for individuals, the matrix is more complex. 

A positive employee experience includes the autonomy and sense of purpose that OKRs provide, but also includes intangible factors that are just as important to individual growth and performance.

Contributing research: