Compensation and OKRs: Should Pay Be Directly Tied to Goals?

Many organizations use a performance-based pay model, where employees receive salary increments, bonuses, etc., based on their demonstrated performance, typically yearly. However, this outdated performance assessment framework relies on top-down goal-setting and annual employee performance appraisals to determine compensation.

The new, unpredictable work world requires a more continuous, people-centric, and collaborative approach to measure employee performance and drive qualitative organizational goals. This shift has paved the way for agile goal management methodologies like OKRs (or objectives and key results) and continuous performance management frameworks to track employee and organizational performance in an evolving work climate. 

But does that mean compensation and OKRs should be linked?

In this article, we'll explore the role of OKRs in management and determine whether organizations should link compensation to goals.

What are OKRs?

OKRs, or objectives and key results, are a modern objective-setting framework that helps managers set and track goals in the workplace. A typical OKR consists of the following:

• Objectives are well-defined, qualitative goals that an organization may want to achieve, such as increasing diversity and inclusion.

• Key results are specific, quantifiable outcomes (usually 2-4 per objective) that measure progress towards achieving the purpose, such as increasing diverse hires from 30% to 50% or conducting 3 unconscious bias training sessions for all hiring managers.

OKRs allow managers to align a company's vision with the tangible outcomes it wants its employees to produce. Unlike traditional performance reviews, conversations around OKR reviews, called CFRs (Conversations, Feedback, and Recognition), happen weekly or quarterly. This allows organizations to acknowledge progress, respond quickly to changes, and ensure real-time feedback.

However, linking compensation and OKRs may not provide a well-rounded assessment of individual employee performance.

Compensation and OKRs: Should They Be Linked?

OKR is a goal-setting framework designed to experiment with different possibilities and drive innovation—and coupling it with pay undermines this purpose. Here's how:

• Encourages safe goal-setting: Employees whose incentives and salary increments are directly tied to OKRs may engage in “sandbagging” or “under-promising,” where they only set safe, easily attainable goals. This can threaten the overall quality of business output. 

• Ignores external factors: Employees may demonstrate high-level skills, deliver above and beyond job responsibilities, and still miss an OKR for systemic reasons beyond their control, such as unrealistic goal expectations or market shifts. Attributing it solely to an employee’s underperformance and adjusting compensation may be unjust. This can bring down employee morale and discourage ambitious goal-setting.

• Encourages individual OKRs over company OKRs: Employees may successfully meet OKRs without collaborating or aligning with organizational values. Rewarding outcomes like these may perpetuate a culture where personal achievements are prioritized over team growth and, by extension, organizational development.

Therefore, linking employee incentives and OKRs may not be a good idea since it may not ensure a well-rounded performance evaluation and disproportionately reward employees without accounting for value-based behaviors or attributes. 

The better approach to determining employee compensation may be to pair OKRs with continuous performance management (CPM), where OKRs target goal management and strategic alignment. CPM ensures ongoing performance assessment and development.

Integrating OKRs with Continuous Performance Management

With an employee-centric framework like CPM, managers can conduct frequent check-ins, have development discussions, and ensure real-time feedback from the top-down or peer-to-peer to ensure continuous recognition and growth. At the same time, managers may leverage OKRs to inform performance evaluations. 

A comprehensive and balanced approach may be necessary, which includes: 

• Incentivizing employees for taking on high-impact activities that directly drive organizational success, even if OKRs aren’t fully met.

• Reinforcing value-based behaviors and employee efforts where company mission may have been prioritized.

• Acknowledging employee contributions above and beyond job expectations.

• Rewarding employees for collaborative and cooperative behaviors.

• Providing ongoing feedback, learning, and development to help employees improve performance.

With OKRs to track organizational performance and CPM to focus on employee development, managers can strive to make salary decisions that collectively account for and reward employees for their achievements, collaborative efforts, contributions, and value-based behaviors that align with strategic business goals.