Should You Use OKRs To Determine Compensation?

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

OKR goals work best when they stretch and push your people to become ambitious and self-driven. In other words, OKRs are most effective when individuals and teams follow strong intrinsically motivating factors, like autonomy, belonging, and mastery. Once compensation or promotion enters the picture, motivations shift towards less-effective extrinsic goals, like status, money, and self-preservation.

Because coupling OKRs with compensation conversations can quickly become counter-productive if not done correctly, we’ve gathered best practices below so you can avoid potential pitfalls.

• Make OKRs an influencing factor in compensation decisions–not the only one. When determining employee compensation, it’s valuable to take into account the ambition of OKR goals and the success of results. But it shouldn’t be the only metric used. Be sure to use other important data points available that influences these performance evaluations.

• Take into account employee behaviors. If you do decide to link OKRs with reviews, as many sales teams find useful, 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 other important daily tasks and conversations that may or may not be directly reflected within the OKR process. Examples of these include 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.

• Reward collaboration over competition. People rarely achieve amazing results all on their own. It often takes the collaboration and help of others to achieve that level of success. Instead of rewarding only one person’s efforts, spread that appreciation to the whole organization or team for meeting ambitious 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.

• Decouple development and compensation 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 Laszlo Bock’s book Work Rules!, he suggests making this separation at least one month apart to create a wide enough gap between the two processes. By taking away concerns around salary, ranking, or status in the OKR review process, you’ll free up your employees to become creative and step into a learner’s mindset. 

• Stay away from formulas. The logic for using formulas says that if one can accurately measure employee productivity, then compensation should follow accordingly. But measuring human performance is never that simple. Formulas often fail to reward the highest performers because productivity is more than the completion of goals. It’s the overall attitude, professionalism, and daily contributions of an employee that goes beyond what any formula can capture. Only a holistic 360° review process with reviews from managers and peers will reveal these vital subjective factors.

• 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 determine base salary.

Watch out for various types of biases 

When managers get together to discuss individual employee evaluation and compensation in a calibration session, be sure to have a checklist on-hand and prepare 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 intentionally looked for.

Here are the six most common examples of bias:

1. Central Tendency – All employees are being rated about average.

2. Leniency/Strictness bias – The appraiser tends to give all employees unusually high or unusually low ratings.

3. 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.

4. Halo/Horns bias – An appraiser’s evaluation of an employee’s performance is biased because their current judgment of the employee is either good (halo) or bad (horns) while ignoring new evidence to the contrary during the time period.

5. 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.

6. 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 perform as their best selves at work.