Right, OKRs should be detached from bonus and performance management. This is also one of the key differentiators from MBOs (Management by Objectives).
On the one side this statement totally makes sense, because this way OKRs drive entrepreneurialism and engage. But on the other side it leads to a lot of follow up questions, especially if you run a team or a company...
We don´t create goals for the sake of having goals. But then, how do we measure performance? How do we evaluate, if someone is ready for more?
OKRs are clearly not supposed to be a performance management tool. There should never be a direct connection between OKR achievement and compensation or bonus. However it´s an excellent source to do continious feedback loops with your direct reports. The blended results of these ongoing and regular feedback loops are great indicators for a later performance evaluation, e.g. during your yearly performance and development talks.
No direct connection. But indirect.
Now. this thesis might differ from some other free OKR ressources. We at How-to-OKR.com strongly believe that OKRs should be directly used to do regular check-ins with your employees. These are short feedback talks on behaviour, role, motivation, praise or criticism. If you use the blended results of these feedback talks as "contribution" indicator for an official performance meeting, then there is an indirect connection between OKRs and performance management. And this is totally o.k.! There also might be other indicators, like „being ready for more“, „social behaviour“, „customer centricity“... You can evaluate all indicators with a 360degree view, meaning employee, manager and collegues rate all indicators. You immediately see discrepancies between the self-assessment and the assessment by others. And this is where you want to focus your development talks.
Here´s an example:
If a team manager is not able to manage and plan his ressources based on key priorities within his OKRs, he will be probably missing most of his OKRs regularly. As these are his own OKRs, he´ll be probably recognizing anyway that there´s something wrong. Also your regular feedback meetings will be focusing on this obvious weakness and you can find ways to help him improve. So, supposing you then have a year-end performance and development meeting, this „contribution“ indicator will be evaluated rather weak.
Also, don´t underestimate the power of „peer pressure“. OKR´s transparency is the trigger that Underperformers will start to feel uncomfortable. They are aware that their peers and collegues recognize that they are contributing less to the overall success.
And what about bonus?
OKRs is about team success, cross functional alignment and focus. It´s not very well compatible with individual bonus schemes or "individual accelerators" . It´s better to run a bonus scheme based on team and/or company results. Otherwise you will be missing the engaging factor and it simply won´t drive entrepreneurialism. Your directs won´t commit to some stretchy, ambitious goals. They won´t come up with new approaches and ideas. They will be cautious not to harm their personal bonus. OKRs should also be eliminating a huge dilemma of traditional goal setting systems. The sandbagging discussions. When you have your personal bonus in mind you certainly try to negotiate targets down in order to overachieve them. And this is clearly counterproductive. So let´s stop it.