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 are able to drive entrepreneurialism and engage. But on the other side it creates lots of uncertainty what this means in reality and what the consequences are.
This short video helps to frame the connection between OKRs and Performance Management:
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 continuous 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."
No direct connection, but indirect - now, this thesis might differ from some other free OKR resources. 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 colleagues 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 is an example:
If a team manager is not able to manage and plan his resources based on key priorities within his OKRs, he will be probably missing most of his OKRs regularly. As these are his own OKRs, he will be probably recognising 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 colleagues recognise that they are contributing less to the overall success.
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.
We clearly recommend to stop individual targets for compensation and focus everything on company goals and team/ departmental goals. This describes success and everyone is able to contribute. You might be worried about the individual component, but you can do a lot with "spot bonus payments" to individuals handed out unexpectedly by their managers.
A true pioneer in OKRs. Keynote speaker for OKRs, goals and result-based leadership. Specialised in enabling C-Levels and Management Teams to use OKRs successfully in order to execute strategy with radical focus. Experienced Manager with international background in various industries. Based near munich, Germany.