Building OKR Compatible Performance Management Systems

By Devon Brown & Daniel Montgomery

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While many organizations have incorporated or adopted OKRs as a powerful goal setting tool, OKRs’ use for individual goal setting, especially as part of a performance management system, has been contentious. There appear to be two camps. On the one hand there are those that assume, somewhat naively, that you can just cascade organization or team OKRs to the individual level and have achievement of those be part of the performance appraisal system. On the other hand, there are the purists that take a Just Say NO approach to individual OKRs. Our view is more nuanced than either.

Performance Management as a Cover-up for Poor Leadership

Performance management has been hotly debated for the last two decades. This debate started in the early 2000s with a push toward Continuous Performance Management (CPM) away from the traditional performance management with the sole annual performance review. Household names, such as Adobe¹, Microsoft², Deloitte³, Gap⁴, and GE have been at the forefront of this trend, that most often looks something like this:

From	To
Annual retrospective of past performance	Continuous performance management
Evaluation of past performance	Coaching conversations focused on future performance
Standardized job description	Holistic perspective on the human
Individual effort	Team sport
Tight linkage of numeric ratings to compensation	Looser coupling, no formal rating or ranking
Highly formalized record keeping	Informal conversations without formal documentation

Despite these much-needed changes to performance management, we question why performance management exists in the first place. It is our belief that performance management systems are too often implemented to cover up for and address mediocre leadership. Top leaders don’t need a performance system to dictate how and when to set and review goals; or recognize the importance of giving frequent feedback and the value of having conversations about performance, short- and long-term development and career paths, engagement, employee’s experience, and well-being. In 20+ years of experience in leadership and organizational development for both the authors, we have seen that these are qualities of good to great leaders. We’ve also seen that the most common behaviors of mediocre (to poor) leaders are to be distracted by solving immediate problems or focusing on the immediate people, operational or customer needs. Rarely do these leaders take time to step back and be strategic when it comes to their team’s and team members’ individual performance: setting goals, providing timely feedback, growing, and developing talent, career planning, etc. 

Effectively integrating OKRs and individual performance goals helps align individual efforts and performance with team, department, and organization goals, and can play a role in refocusing performance management to be a much needed and valuable part of effective leadership. 

The Tension between performance management and OKRs

The logic behind the Just Say NO approach to incorporating individual OKRs with performance management systems is predominantly rooted in the origin of both. Individual performance management serves several purposes, including ensuring legally defensible equity in compensation and promotional opportunities; identification of individual and organizational learning and development needs; and fair distribution of monetary and non-monetary rewards. OKRs, on the other hand, were originally designed to facilitate strategy execution, growth, and rapid innovation. While OKRs are a collaborative tool used by teams and organizations to set, and execute on, challenging and ambitious goals (inherently requiring innovation and expansive thinking), goal setting in performance management has been traditionally individualistic and constrained by the link to compensation and rewards.

Beyond the origin of both, the core tension to incorporating OKRs with individual goal setting is that stretch and collaboration are essential to OKRs. To be truly transformative, OKRs require a high level of stretch. But the environments in which OKRs originated required boldness and risk tolerance, or else the certainty of obsolescence and decline. Tolerance for failure and a high level of psychological safety are essential. In practice, many organizations embracing OKRs have not made this cultural transition. Applied to individual performance, with its implications for “fitting in,” promotion and rewards, individual OKRs run the risk of becoming non-stretchy, overly safe, and predictable. As a result, many seasoned OKR consultants flat-out reject the idea of individual OKRs. 

An employee performance system that conflicts with the stretchy nature of OKRs will dilute any transformational impact. And an ambitious transformational growth strategy that ignores employee individual goals and existing performance systems will inevitably fail. In real life, the connection between organizational, team and individual goals is inescapable. As OKRs become more common, compatibility with other organizational systems and processes — including performance management — will be critical. 

There is a place for OKRs at the individual goal level and as a compatible part of the organization’s performance management system. But unlike the naïve leaders and HR teams that want to replicate the OKR format without rethinking the performance management process, we believe this compatibility is only possible if the 4 Principles outlined below are taken seriously. When managed properly and with certain factors in place, OKRs can be integrated effectively with organizations’ performance management systems.

Principle 1: Create a culture of quality, ongoing conversations

Much of the focus and efforts to transform traditional performance management systems have focused on the architecture of performance systems and the technology. Debates about ratings vs no-ratings, goal structures, feedback and evaluation methodology, and tracking expectations are all important, but unfortunately are not the most important focus. These technical features are meaningless without rigorous and uncompromising focus on quality ongoing conversations. 

The key issue here is both frequency and quality. Like OKR discussions, performance conversations are most effective, impactful, and drive performance when they happen frequently. 

The ideal cadence is context dependent, varying by the role, individual employee, and the work. While operational or tactical one-on-ones are important, even critical for getting work done and driving results, most managers do not spend nearly enough time on the bigger, more strategic, and development-oriented conversations. A great model is the check-in (borrowing from Adobe) – an ongoing, two-way conversation where employee and manager discuss performance and career growth, and exchange real-time feedback…a meaningful conversation about what’s going well, what can be improved, and what to focus on next to drive business impact and career growth.⁵

Regardless of the performance tool or technology used to enable performance tracking, what matters is the quality of the conversations. So, while the frequent check-in is important and critical, the quality of these conversations is where the magic happens. Having healthy conversations that surface the real issues impacting employee performance, engagement, and retention, requires that leaders cultivate an atmosphere of psychological safety. Google’s Project Aristotle⁶ studied over 200 teams at Google to determine the factors that lead to high levels of team performance. Psychological safety — meaning that team members “feel safe to take risks and be vulnerable in front of each other” stood well above any other factor. People who feel safe are far more likely to speak the truth of what they are observing and learning, admit mistakes, and suggest innovative solutions. And, Google found, they feel more engaged and are less likely to quit. 

Action Steps: 

1. Borrowing from the regular cadence of team OKR check-ins, develop a performance management architecture that is built around frequent and ongoing conversations. A structured approach such as Adobe’s quarterly Check-in⁷ focusing on 3 conversations (expectation setting, development, and feedback) provides a framework for these conversations. We like to add a 4^th conversation – well-being.
   
2. Effective performance conversations are not just about frequency, equally, if not more important is the quality of these conversations. It will benefit the organization to ensure that leaders and employees alike have the skills and mindset to:
   • build psychological safety^8,9;
   • ensure the process and conversations are collaborative (a great resource for coaching conversations is Michael Bungay Stainer’s book, The Coaching Habit¹⁰);
   • be forward focused¹¹;
   • pay attention to not just results and outcomes but to growth and progress (see Carol Dweck’s work on Growth Mindset¹²), critical especially when aligning with OKRs that have a stretch element.

Principle 2: Drive what Matters

Goal setting in all performance systems provides metrics by which organizations can measure performance. It is critical that these metrics reinforce the specific behaviors and outcomes we desire. We know with OKRs the importance of measuring what matters. When it comes to individual goals setting, this message is the same. Unfortunately, many performance goal metrics are problematic. We have seen performance goals that are unbelievably complex, encompassing business goals, development goals, organizational values, or leadership principles, as well as team goals, all of which are weighted. The result, lack of focus – too many goals to pay attention to, and the complete neglect or focus on certain goals can be watered down by the aggregate power of the rest of the goals. 

Can an individual’s participation in OKRs play a role in their performance evaluation? Absolutely! While this may sound like a contradiction, it’s not. Given that OKRs are primarily a team sport, it’s essential that individuals are good team players, contributing ideas, observations, and activity to the work of the team via the conversational skills we described above. While there is a place at times for individual goals, it is the team goals that truly deliver innovation. But every individual on the team plays a role in making that happen. Too often, performance management systems encourage individual star performers and pay less attention to team performance. In fact, one of Project Aristotle’s more provocative findings was that “Who is on a team matters less than how the team members interact, structure their work, and view their contributions.” 

So much of work today is complex enough to require interdependencies and collaboration. For this reason, setting and measuring individual goals is often unpractical and even counterproductive. When the entire team is required to work collectively to accomplish a purpose, team goals (and even rewards) are an effective way to drive outstanding collaborative effort. 

In an OKR compatible performance system, goals must drive not only the desired business outcomes, but the behaviors (leadership principles or organization values) that are desired.

Action Steps: 

1. Goal setting can and should be a team sport. Ensure individual goals not only drive the desired behaviors and outcomes that matter but are aligned to support the goals of other team members, teams, and the larger organization.
   
2. Encourage collaborative behavior by using team bonuses to reward outstanding OKR performance on the part of an entire team.
   
3. Keep goal setting simple, focus the attention of goals on a few categories, such as business results (the WHAT) and leadership behaviors (the HOW). This focus ensures that the necessary strategic work of the organization is accomplished in a manner that is aligned with the organization’s values or leadership goals, to support the desired culture. 

Principle 3: Balance Stretch and Agency

Traditional performance management is incompatible with the stretchy quality of OKRs. The uniqueness of OKRs is their ability to provide inspiration and aspiration as well as provide the measurable and tactical activities necessary to drive these outcomes. One of the most common criticisms of using OKRs with individual performance goals is the link between goal attainment and rewards. If rewards are tied to goal achievement, it is only natural that individuals will sandbag, setting goals that are achievable rather than stretchy. If organizations emphasize the performance of routine job duties and following the rules, and that punish people for failure, a rational person learns not to “rock the boat.” If this is the kind of culture you want, you should NOT be using OKRs at the individual level, or perhaps at all. 

To reap the benefits of OKRs, not just as a platform, but as a way of thinking about goals, performance systems must be able to account for and reward stretch goal achievement and efforts (even if stretch is not fully met). They need to encourage stretch goals that transform without risk of individual “failure” and subsequent performance and compensation implications.

For OKRs to drive focus and priorities, individuals must have the ability and the control over the activities and behaviors necessary to achieve the desired results. As roles change and increase in responsibility and leadership, so does the level of impact and agency. An individual contributor or front-line supervisor may have a limited span of control, and therefore relatively narrow OKR goals. Conversely a department head or VP is ultimately responsible for a much wider area and therefore a wider span of OKR goals. While the VP of HR may have a broad OKR Objective focused on improving employee engagement, a Training Specialists may have a narrower Objective around the onboarding training, which may ultimately serve to help with engagement. If an individual is going to be measured on a goal (OKR or otherwise), they must have the resources to impact the results.

Action Steps: 

1. Reserve OKRs for goals that require new practices, ways of thinking, or change to performance and avoid OKRs for business-as-usual goals, tasks, activities. For business-as-usual goals, use KPIs.
2. Individuals should have the ability to impact or control the variables that drive (stretch) goal achievement.
3. For individual goals, explore a combination of stretch goals (moonshots) in conjunction with achievable goals (roofshots). 
4. If comp/bonus is (to any extent) associated with goal achievement, then ensure that rewards are distributed not just for stretch goal achievement but for effort, transformation, and results achieved in the name of stretch goal achievement.

Principle 4: Decouple Performance and Compensation

As discussed previously, linking goal achievement to performance, and therefore rewards, has some potential intrinsic challenges. If not addressed – sandbagging goals to ensure success, and potentially reinforcing the wrong behavior (the heroic individual vs the team player) becomes commonplace. It is difficulty therefore to have a conversation about performance systems without addressing compensation/rewards. 

Most organizations utilize some form of pay-for-performance for making compensation decisions. Increasingly, though, we are finding that pay for performance is not as powerful of a motivator as we have historically thought, and in fact may reduce performance. According to a study by Willis Towers Watson¹³, a leading compensation consultancy, only 20% of North American employers say merit pay is effective at driving higher levels of individual performance. Only half agree that annual bonuses boost performance. And only a third say their merit pay program works to differentiate pay based on individual performance. Other studies have shown that extrinsic rewards, to the extent they are effective, have a relatively short-term impact. Merit-pay and bonuses are soon taken for granted and forgotten. And traditional performance management conversations can have a negative impact on morale and voluntary attrition.

Intrinsic motivators play a much bigger role in performance than most companies assume. Daniel Pink’s review of a wide body of research showed that three factors most influence motivation and performance¹⁴:

• Autonomy: the ability to have control over one’s priorities based on observation of what’s most important
• Mastery: the capacity to keep learning new things
• Purpose: meaningful work tied to greater impact in the world

McKinsey research shows that praise from immediate managers, leadership attention (e.g., one-on-one conversations), and a chance to lead projects or initiatives are no less, and in some cases, even more effective as motivators than common financial incentives. And work from the NeuroLeadership Institute focuses on the importance of perceived pay fairness (an argument for transparency of compensation in relation to market compensation).

Almost all OKR experts recommend decoupling performance management from compensation. John Doerr suggests that OKRs and performance be amicably divorced, saying “OKRs and compensation can still be friends. They’ll never totally lose touch. But they no longer live together, and it’s healthier that way.”¹⁵

But what does “decoupling” mean exactly? 

Is it realistic for a manager to separate her perception of someone’s performance from her perception of the level of deserved compensation? We think not. Much has been made of the Silicon Valley practice, at least in some firms, of simply paying enough, based on market rates, to take money off the table. One suspects that this is a function of a particular high-growth industry rather than an approach that works in every industry, job market, and stage of the economic cycle. 

We’ve said that in most cases, few individuals can be held solely accountable for business outcomes, the results that aspirational OKRs point to. Beyond that, there’s more to organizational life than defined business outcomes, such as leadership behavior and values.  An all-too-frequent scenario is an employee that produces stellar results but does so in a manner that does not align with the company values (i.e., working solo vs collaboratively, leaving the proverbial train wreck behind due to aggressive behavior, rudeness, arrogance, or poor communication). Another potential scenario is the employee that may miss or barely achieve a goal but provides invaluable organizational contribution through other work and efforts. This points to a need for manager discretion and appreciation for how individual attributes benefit the health of the organization as a whole.

There must be an appraisal and compensation strategy that recognizes the difference between achieving safe versus stretch goals. Would you rather reward an employee who always sets safe goals and inevitably achieves them? Or an employee who takes a risk, tries hard, doesn’t quite get there, but learns and contributes a lot along the way? Which one deserves the merit increase or bonus more?

Action Steps: 

1. Allow for manager discretion in handing out merit increases or bonuses, not a narrow, mechanical approach tied to measurable achievement of stated goals. Reward ambition, contribution and learning rather than predictable performance of safe goals.
2. If you can, pay people enough to get money off the table, and rely on better proven, intrinsic motivators of engagement and performance. Roles where this may not be appropriate for may include traditional sales roles with a commission structure, executive roles, or certain roles in which there are clearly defined outcomes or tasks that do not allow for variation or are compliance based. 
3. Part of the problem is the fear-inducing nature of traditional performance appraisals. When an anxious conversation is paired with news about adjustments to compensation, the association of the two is stamped on the recipient’s mind. Laszlo Bock, former chief people officer for Google, made it a practice to separate performance coaching sessions from compensation discussions by at least 30 days.

Conclusion

Without a doubt, rethinking performance management continues to be a pressing topic for HR, and organizations in general. The recent emphasis on humanizing work and the need to address the impacts of the great resignation make this topic even more relevant. As OKRs become more familiar and a part of organizations’ planning and goal setting processes it will become increasingly more important to find ways to incorporate and align OKRs with other organizational systems – including performance management. There are some challenges to bringing OKRs into the individual performance enablement system. By addressing these challenges, using the 4 principles outlined here, organizations will be able to gain greater alignment around their OKR implementation of strategic priorities.

Interested in finding out more about how you can create an OKR-Compatible Performance Management System? Reach out to the authors:

Daniel Montgomery, Managing Director, Agile Strategies. Email: dmontgomery@agile-strategies.com Web: www.agile-strategies.com

Devon Brown, Founder, Inciting Leaders. Email: devon@incitingleaders.com Web: www.incitingleaders.com

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Footnotes:

¹  https://www.adobe.com/check-in.html

² https://learn.microsoft.com/en-us/dynamics365/human-resources/hr-develop-performance-management-overview

³ https://hbr.org/2015/04/reinventing-performance-management

⁴  https://www.hbs.edu/faculty/Pages/item.aspx?num=49707

⁵ chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.adobe.com/content/dam/acom/en/aboutadobe/pdfs/adobe-check-in-toolkit.pdf

⁶ https://www.nytimes.com/2016/02/28/magazine/what-google-learned-from-its-quest-to-build-the-perfect-team.html

⁷ chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.adobe.com/content/dam/acom/en/aboutadobe/pdfs/adobe-check-in-toolkit.pdf

⁸ Edmondson, Amy, The Fearless Organization.

⁹ https://www.strategy-business.com/article/Using-Neuroscience-to-Make-Feedback-Work-and-Feel-Better

¹⁰ Stainer, Michael Bungay. The Coaching Habit: Say less, ask more & change the way you lead forever.

¹¹  https://www.gartner.com/smarterwithgartner/motivate-employees-with-ongoing-forward-looking-feedback

¹² Dweck, Carol. Growth Mindset.

¹³ 2016

¹⁴ Pink, Daniel. Drive: The surprising truth about what motivates us.

¹⁵ Doerr, John. Measure What Matters.