OKRs and Performance Management

OKRs, Performance Management, and Incentivization (Without Disincentives)

According to Gallup,[1] in the United States, worker engagement (the involvement and enthusiasm of employees in their work and workplace) is on the decline. From 2019 to 2022, engagement elements that employees reported as declining the most included:

·        Connection to the mission or purpose of the company.

·        Opportunities to learn and grow.

·        Clarity of expectations.

·        Opportunities to do what employees do best.

Decades of research has shown that traditional approaches to evaluation and incentivization in the workplace run counter to important performance factors such as intrinsic motivation and ethical, high-integrity workplace behavior, but not a lot was being done about it. The pandemic finally disrupted the status quo, and now employers focused on performance are updating their approaches to management, incentives, and rewards.

Why not to adopt OKRs

It’s painfully common, I’m afraid, for OKRs to be introduced in an organization because senior leadership wants to increase the output of the do-ers in the organization without having to evaluate themselves and the role they play in organizational productivity. As a result, two of the most common questions I’m asked are:

·        “How—practically—do we localize OKRs down to each individual in the company?”

·        “How can we link performance evaluation and individual incentives to OKRs?”

And the simple answer I provide in response to both questions loses me a fair amount of business (which is fine by me):

·        “You don’t.”

What about individual accountability and individual OKRs?

Traditional OKR models often attempt to cascade all the way down to the individual. But have you ever seen any system cascading down that far that wasn’t full of assigned activities instead of clear, objectively measurable outcomes and expectations? (If, in fact, you’ve been looking.) Probably not. Me either.

Cascading OKRs down to the individual and continuing to call them “objectives” and “key results” guarantees the erosion of key result integrity. It’s reasonable to create speculative stretch goals for the collective—the whole is greater than the sum of its parts—but at the individual level, goals need absolute clarity about what is expected.

Too often when OKRs are cascaded down to the level of the individual, the system reintroduces subjective evaluation. It’s not possible (outside of sales) to consistently and fairly set a threshold for the measurable outcome an individual must achieve to be considered successful. The desire to cascade goals all the way to the individual rarely exists for the purpose of increasing the empowerment of that individual. Instead, it’s often to control and micromanage, or worse, it’s a futile attempt to impose a more “objective” method for individual evaluation because some are not performing to expectations.

Most OKR experts agree that there should be some “space” between organizational OKR attainment and individual evaluation. To begin to understand why, let’s take a thoughtful look at individual goals.

Why use individual goals?

Individual goals are important for clarity of expectations, motivation, evaluation, and rewards—and ultimately for achievement of the organization’s goals. Individuals need to know what’s expected of them, with clarity. Ideally, self-set individual goals are in line with a person’s intrinsic motivation and career/growth goals. These goals are the last link in the chain that answers the ever-important question: “Does my work matter?”

Without your people hitting their marks, your organization is unlikely to achieve its organizational goals. Most organizations, therefore, need some way to manage performance. Individual goals may—if thoughtfully structured and evaluated—provide a basis for performance evaluation and development. Individual goals and their attainment also often play a role in incentive pay and rewards calculations.

I will address the topic of performance management here, with a caveat. It breaks my brain that organizations rely so heavily on individual goals that are self-set to inform incentives and rewards. There’s an inherent risk of unfair arbitrariness when basing rewards on self-set goals. I would rather see leaders give their reports direction on goal setting while clearly communicating objective performance expectations. Then people can create self-set growth and development goals for the purpose of learning, not primarily for evaluation.

In an ideal world, all organizations would have excellent leadership that is skilled in the nuances of individual performance and growth, and each leader could be trusted to evaluate their reports in the way that makes sense for their discipline. The outcome would be a fair, high-performing system with happy employees. High performers are rewarded and retained; low performers are coached and developed (or managed into roles where they can be more successful). The “middle” is either happily humming along in their Run-the-Business modes to collect their paycheck twice a month or is coached to increase the likelihood they’ll step up into the “high performance” zone.

In my dreams. Not all organizations are able to stitch together the procedures, learning and development infrastructure, and modeled leader behavior to achieve this vision. So let’s talk about scenarios that are a little more down to earth.

I’ll be the first to disclaim: I am not a Human Resources consultant, nor am I a researcher in the field of performance management. I’m an OKR coach and leadership development pro who is asked by almost every client I work with to reconcile their group and individual goal-setting practices. My approach comes at these questions through an “operationalizing for goal achievement” lens.

The best practices shared here have been implemented by my clients with ongoing success. They serve as a starting place for your own organization’s re-examination of your performance management practices.

Best practices for individual goals in the No-BS OKR environment

The most important best practices I coach in the area of individual goals and performance management are:

·        Be mindful of the behaviors that individual and group goal-setting, performance evaluation, and rewards practices are designed to drive.

·        Create some separation between the attainment of group OKRs and individual performance evaluation to ensure courageous, stretch group OKR creation and a consistent, predictable, and fair individual performance evaluation model.

·        Let go of trying to localize OKRs down to the individual; doing may be arbitrary and nonsensical at scale.

·        Take effort toward OKRs and individual stretch goals into account, along with performance on RTB/milestones-based committed goals. The evaluation rubric should ensure fairness across different role types (and shouldn’t disincentivize ambitious goal setting).

·        Ensure transparency about how incentives are funded and calculated.

Incentivized Behaviors

Too frequently, performance management practices are variable across leadership and uncomfortably subjective. Typical leaders may unfairly reward employees they like or even who are more “attractive.”[4] Subjective assessment encourages some of the most damaging “managing up” behaviors,[5] including overemphasizing being “pleasing” to the supervising leader, sometimes at the expense of the work itself and often not in the organization’s best interest compared to encouraging a focus on delivery of excellent work. 

These risks create the craving for objective numbers-based evaluation models (and hence, linking OKRs and performance management), which you might think you’re getting by cascading OKRs to the individual. But when individual evaluation and incentives are linked to self-set numerical goals, two things might occur: those who sandbag their own goals may be rewarded as high performers because they’ve purposely set their goals to easy to reach levels (making their numbers “look good”); and those who set ambitious goals and work hard to achieve them may be penalized with lower rewards even if their overall contribution is higher than their sandbagging colleagues.

There is no easy answer here. The bottom line is to carefully examine the implications of your individual evaluation and incentives model and watch carefully for disincentives and areas of unacceptable bias. Perhaps invest in leadership development to enhance upper management’s people skills for evaluating and managing reports to bring your organization closer to the ideal envisioned at the top of this section.

Separate Group OKRs and individual performance evaluation

Building on the last section, I agree with other leading sources in recommending distance between the attainment of organizational OKRs and determination of individual performance management.

Having individual rewards tied closely to the numerical attainment of your group or shared key results encourages conservative goal setting. In that case, people are incentivized to set goals they know they can achieve; this is the antithesis of legitimate OKRs, which need to be stretch. You want your OKRs to encourage ambitiously stretching together to take your organization to a whole new level of growth, improvement, and performance. For that to be the case, you and your people must be safe to try—and even fail—at your objectives and key results, in the pursuit of experimentation and learning.

When group OKRs have distance from individual performance management, your organization can rally together to generate mutual support and cheer each other on. When things are challenging or when you’re having one of those particularly interesting learning experiences, you’ll know you’re in it together. That’s not going to be the case if the people involved are worrying about their personal bonus or likelihood of promotion.

In the group goal setting—when you’re using OKRs in the No-BS model—you set ambitious goals to the tips of your fingers of what’s possible. You ask: “What would be amazing to achieve if everything goes right?” Then you harness the curiosity, inspiration, and motivation those goals encourage and get to work, doing your best to make as much progress as possible. If you don’t achieve the goal, then you ask yourself what you can learn. You reset your goal, and try again.

But in the individual goal arena, organizations rely on performance to evaluate an individual. There are consequences of underperforming, both for organizational impact and each person’s career growth and incentive pay.

OKRs and individual goals are like two different animals: meerkats and tigers.

Meerkats live in large groups and rely on each other for survival, with each member of the group having a specific role: foraging for food, keeping watch for predators, or caring for young. Tigers are solitary hunters and usually live and roam alone (except during mating season, or when a mother is raising her cubs).

When working on your group OKRs, use your meerkat brain. You can afford group goals to be stretch because the whole is greater than the sum of its parts. You’re safe to try and even fail, to operate with a curious learning mindset because of the relative safety of the collective. Your meerkat brains say: “We want to set ambitious, inspired goals because that’s how we’ll all be the most successful together.”

On the other hand, when working on individual goals, most people tend to be focused first on what must be achieved to maximize their individual potential and bonus or incentives, with the collective good as a second priority. Most people are more comfortable identifying milestones and commits, sometimes set as objectively-measurable goals, but always at a threshold they believe they can safely achieve. Individuals may not be “safe to fail” on milestones or commits; there may be serious consequences for non-achievement. So in individual goals, people are much more in their tiger brains. They are aware of their singular responsibility for their own “care and feeding”—more of a survival brain state: heightened vigilance, judgment, and evaluation. They’re not as consciously wired for learning because learning may come with risks. The tiger brain says: “I want to set goals I know I can achieve in order to maximize my bonus.”

Group OKRs and individual goals—even aligned individual goals—are rooted in different questions.

·        In group OKRs, you’re asking: “What are our most important objectives? How will we know if we’re making progress or success? How can we set ambitious, inspired goals, to maximize our achievement together?”

·        In individual goals, you’re asking: “How does my work support our OKRs? How might I learn and develop or grow in a way that helps my career and the organization? What goals can I set to show my contribution but I know I can achieve in order to earn my bonus?”

Group OKRs and individual goals are two different animals. Individual goals may align up to the organization OKRs. Ideally, individuals would look up the food chain to consider how they can maximally support the organization’s OKRs (and other strategic inputs). But the two types of goals require different operations and evaluation standards. It makes sense to think of group OKRs and individual goals as two different (though perhaps linked) things, treated differently by the practices and procedures of our organization.

Let go of the idea of localization to the individual

While sometimes it may make sense for salespeople or executive leaders to have commission- or performance-based pay packages, for other positions it can be problematic to link individual performance to OKR attainment elsewhere in the organization.

A key factor is responsibility. If an organization localizes OKRs down to every individual, it would be necessary to apportion responsibility mathematically through roll-downs to every person in the organization. This approach is: operationally difficult (if possible at all); arbitrary (Is Sally in Customer Support responsible for 0.05% of the organization’s customer retention or 0.07%? Is James in Marketing responsible for 1% or 2%?); and the math breaks every time someone joins or leaves the organization.

Still, while it may make sense to roll down key results to roles where the math adds up, even in the simplest of these scenarios—sales—it’s not that simple. Theoretically, your revenue target at Level 1 can be localized to regions at Level 2 and then perhaps down to individual salespeople at Level 3. But even here you have to check yourself. Is the Level 1 revenue number a stretch goal? If so, on what threshold for success will you evaluate your salespeople? Is their target a commit or a stretch target? Are they are safe to try and fail? (Most likely not: if your sellers are safe to try and even fail, your revenue forecast may be too unreliable to operate as a commercial entity.)

Instead, again, it’s helpful to think of group OKRs and individual goals as two very distinct (if linked) things, with quite different purposes and practices.

Individuals only rarely measure success in true key results

Individuals may have a larger number of important “maintain” activity/milestones and “Run the Business” goals or responsibilities that should factor into their individual performance evaluation (but don’t belong in OKRs).

If individuals were to focus entirely on stretch hypothetical localized-to-the-individual-level Key Results, the machinery of your organization would come to a screeching halt. Where organizational OKRs are predominantly stretch, individual goals necessarily contain more mandatory goals. Individuals often deliver the work that make up dependencies to their colleagues’ performance. To leave what an employee must do out of their performance equation makes no sense.

Also recognize that stretch goals by definition take you into unknown and uncertain territory. People may lack the autonomy, authority, capacity, and resources to achieve their experimental, speculative stretch goals. While individual stretch goal-setting is critically important for individual growth, career fulfillment, and development for many employees, you can only hope to fairly evaluate a person’s effort toward their stretch goal, not their attainment of the number itself.

Carefully design the individual evaluation rubric

The individual evaluation rubric must be coherent both for evaluating performance on RTB/milestone-based goals and stretch aligned individual goals. The evaluation rubric should ensure fairness across different role types (and shouldn’t disincentivize ambitious goal setting).

How are OKRs and individual goals different?

Before we look at example rubric factors, let’s have one more philosophical conversation to get aligned. Now that we’ve discussed that there should be some “distance” between group OKRs and individual goals and the reasons localizing down to the individual for everyone in the organization don’t make sense, let’s look a little deeper at how to think distinctly about OKRs and individual goals.

At this point, I often hear the objection: “People are confused by having sets of goals: OKRs and individual goals. Why can’t we just have one and stick with it?”

My answer is: Sometimes things just are not as simple as you would like them to be.

OKRs are group goals, used to increase your focus, clarity, and alignment about shared responsibilities. You work OKRs like meerkats.

Individual goals are individual. They help individuals identify how their work aligns to the organization’s goals and, to provide a basis for evaluating their contribution, their opportunities for growth, and their individual rewards. You work individual goals like tigers.

In the individual goals scenario, you’re evaluating an individual’s performance so that you can promote, incentivize pay, and decide on rewards. Promotion, incentive pay, and reward decisions have to have an answer. Individual growth may be about the journey, but the nitty gritty of how much people get paid and when they are promoted is a matter for evaluation and decision.

In the group goals situation of your No-BS OKRs, the mindset you apply is not evaluating the performance for the sake of the attainment number itself. You are looking at what you learned from having tried.

So what can you do?

Leverage 360 feedback and train leaders well so that they’re equipped to fairly and in as non-biased-as-possible way evaluate OKR contribution by their reports.

OKR attainment may be a calculation factor for determining bonus pool funding

Some organizations do include OKR attainment as a factor for determining the total bonus pool. This math is remote enough from individual performance that it shouldn’t skew the group goal-setting toward the sandbaggers.

Effort toward achieving OKRs may be taken into account in individual evaluation

If you want OKR attainment to factor in your comp or rewards model, consider an incentive pay program that takes OKR effort into account as a discretionary element of the evaluation and reward determination.

I have been known to advise incentive pay models that take into account OKR effort, but never OKR attainment. Evaluations and compensation decisions can be made with some discretion, with leaders taking into account how much effort their teammates extended toward the OKRs. Yes, this is a subjective assessment. But the downside of rewarding based on OKR attainment (which may look more objective on the surface) encourages the wrong behavior (conservative goal-setting) and punishes desired behavior (setting of aspirational, innovative, and transformative goals). You might have someone set an aggressive objective and key result and they might only partially achieve it, but that partial achievement might be of tremendous value to the business.

In a Rebelutionary organization where facts and truth matter, it’s possible to make it okay for any one employee to not always be at the “positive” side of the bell curve. Even your top performers when promoted into a new role may spend some time on the learning curve side. That’s normal and totally okay. If you make it so that the bump in salary stemming from the promotion balances out their reduction in bonus potential while learning their new role, you’ll be communicating that you’re okay with a learning curve.

It is normal, okay, and truthful to recognize that every person in an organization experiences rock-star quarters and learning quarters. Rock-star quarters can be rewarded; in learning curve mode, the individual may not be your organization’s top performer, but they’re charging their batteries to step back into that spot when the time comes. All A’s, all the time, for everyone, is not a performance management model for high performance. Leaders and people working in environments where performance truly matters must get used to the idea of this ebb and flow of recognition and reward.

Having a model that allows discretion to take OKR effort into account instead of numerical attainment can be successful. It incentivizes the right things: setting aggressive, aspirational objectives and key results, and then trying really hard to achieve them.

We’ve also seen some incentive compensation models that do take numerical attainment into account, but at a group level across the company. Let’s say the company achieved 60% of their key results. In a situation like, they would fund their bonus pool at 60%. This creates conditions where people are more likely to use their meerkat brains when creating group OKRs. They can then set aspirational goals and work hard to achieve them together.

But again, anytime you’re tying compensation to an attainment number, people are incentivized to set conservative goals instead of stretch objectives and key results. Use that model with awareness and great care.

Be transparent about performance management and incentives

If performance management incentives are meant to be motivating and support employee growth and organizational performance, it is counterproductive for the process of incentive allocation to be a black box. The more clearly and transparently each element of performance management and incentivization is articulated, including guidance both for leadership and individuals, the more likely the system will do what you want it to: increase organizational performance.

I’ve worked with organizations where their performance management “system” was a choose-your-own adventure. People could create and edit their goals on any day of the year—including the day they’re being evaluated; there may—if anything—be a one-sheet describing the performance management requirements, but little by way of examples or expectations.

In those systems, there is a lot of autonomy and leader discretion involved in performance management. This can work, but even the most free spirits welcome clear expectations and predictability for how they’ll be evaluated. The risk of the choose-your-own-adventure approach is that evaluation and rewards may be arbitrary at best, and biased and unfair at worst, neither of which create conditions for high-performance focused on outcomes.

Instead, organizations should provide clear guidance on individual goal setting for leaders and individuals, including step-by-step goal-creation worksheets (if possible); hypothetical examples for various role types for leaders and reports; and hypothetical examples of evaluation scenarios for leaders. Leaders should be trained on the actual standards for goal scoring: a “nice” leader giving out A+s across the board doesn’t help their team develop; and a “tough” leader giving out Ds across the board doesn’t necessarily motivate their reports to improve and grow.

TL^DR Key Takeaways:

1.      Aligned individual goals are important both for individual clarity of expectations, individual motivation, and for achievement of the organization’s goals. Without your people hitting their marks, your organization is highly unlikely to achieve its organizational goals.

2.      Best practices for aligned individual goals in a Rebelutionary organization include:

a.      Being mindful of the behaviors individual and group goal-setting, performance evaluation, and rewards practices are designed to drive (intentionally, or unintentionally).

b.      Ensuring some separation between the attainment of group OKRs and individual performance evaluation, to ensure courageous, stretch group OKR creation, and a consistent, predictable, generally “fair” and unbiased individual performance evaluation model.

c.      Aligned individual goals are not OKRs localized down to the individual: doing so is nearly impossible, and may be arbitrary and non-sensical outside of organizations like Sales where quotas can be apportioned down to the individual.

3.      A Rebelutionary Performance Evaluation and Management model includes:

a.      Transparency about how incentives are funded and calculated.

b.      A rubric for evaluating both performance on RTB / milestone-based goals and stretch aligned individual goals that increases fairness in evaluation across different role types (and doesn’t disincentivize ambitious goal setting).

c.      Humane practices around special circumstances, while maintaining meaningful goal-setting.

4.      Watch out for:

a.      Disincentives created by linking individual evaluation or rewards to the attainment of OKRs.

b.      Evaluation schemes that risk “under-rewarding” desired behavior and “over-rewarding” undesired behavior.

5.      The organization should provide clear guidance on individual goal setting for people leaders and individuals, including step-by-step goal-creation worksheets (if possible); hypothetical examples for various role types for leaders and reports; and hypothetical examples of evaluation scenarios for leaders.

6.      Senior leadership should also provide clear schedules and expectations so that the organization doesn’t have to “wing it” on such an important element of leadership and goal achievement.

[1] https://findrc.co/gal2023EErep

[5] To learn more about my take on the common coaching around “managing up” as an essential workplace skill, and replacing that coaching with an emphasis on learning self-management skills, check out the two-part podcast series on the downsides of managing up, in episodes 02 and 03 of the Thinkydoers podcast:   https://redcurrantco.com/thinkydoers/thinkydoers-ep-02-the-downsides-of-managing-up & https://redcurrantco.com/thinkydoers/thinkydoers-ep-03-replacing-managing-up-with-self-management