Why, you MUST include OKRs in your compensation, rewards and recognition systems

Why, you MUST include KR in your compensation rewards and recognition system

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Executive summary

Popular business press has it that one should not include OKR in your compensation systems. Interestingly, enough, the people who are promoting that idea have never run their own business, had to hire or fire, dozens of people, align a global team, etc..

?The core of OKR philosophy is that of focus on the few things that will have maximum impact on the organizations success (AKA “Measure what matters”) – exactly what we want to reward people for accomplishing.? If we are not rewarding people for achieving what matters, what are we rewarding them to do? What does not matter?

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First, let’s explore why we should be including OKR our compensation models:

• The fair deal -? The fair deal between the organization and the employee is that the organization is clear about what they want, and the employee agrees to work on those goals in exchange for their compensation. Simple. The fair deal between employee and individual. Since the organization captured by their goals in OKRs, that is the foundation for the fair deal.
• Clarity ?- OKRs provide the clarity on the organization's goals and key results that every part, department team and individual align to. Some people call it the “north star”, as in that navigational target that we all aim for. It does not make sense to align the entire organization – budgets, head counts, product development, customer support, etc. to those OKRs ?and suddenly compensate people for something different. Doing so loses all that alignment because the individuals will pursue what they paid for, not for what is in the OKRs. Organization is trying to head for the north star and the employees are headed elsewhere. (Maslow’s hierarchy of needs and Pavlovian behavior have proven these points.)

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Now let’s take a look at some of the arguments presented on why one should not link OKRs to compensation

1.?????? Gaming the numbers - it is often argued that if people were compensated for their OKR, they would begin to report false numbers in order to increase their compensation.

This argument would have made sense in 1960 when our transactions were kept with pen and paper, and it took weeks of months for information to flow through your organization. In those days you could report a false number and it could take the organization months or more to discover the mistake. This argument would assume that the meantime you take your bonus and run!

For the purposes of this explanation let's assume that the person we're concerned about is a salesperson entering and falsified sales in order to earn commission. The problems with this outdated concern include:

• These days most of these transactions are handled electronically - the customer orders on the web, the ERP system sends out the order, the automated warehouse picks and packs the product and the accounting system invoices them. There are very few opportunities for that sales person to enter in false data.
• Even in the most antiquated company in 2023 the elapsed time between a sale and other systems reflecting the transaction, such as order processing inventory accounting etc is nanoseconds. Certainly not enough time for the individual to get paid their Commission and make a run for it! (Again a valid concern in 1960 not so much in 2023.)

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2.?????? Gaming their OKRs - this is a variation on the above scenario where someone would purposely set easy OKRs so that it would be easier to achieve them and earn their bonus.

The interconnectedness of OKRs – OKRs go across organizational silos - makes it impossible for one area to create easy to achieve OKRs because the linked objectives, and the OKRs upstream and downstream departments will show the disconnect. For example production would be showing OKRs at twice the level of what sales had set and the gaming would be caught even before the quarter began.

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3.?????? Gaining our performance - in this case the individual/team/department skews their behavior specifically to make sure they achieved their OKRs. Well that is exactly what it is we would like to happen! OKRs are all about having us focus on the things that will ensure our success, and stop doing the things which don't enable that success.

The real risk here is not that people skewed their performance towards the OKR, but rather the organization has set the wrong OKRs, so people work aggressively towards the wrong outcome. ?Many of the popular OKR box take note of VW’s intentional generation of false emissions data, or the fraudulent practices of Wells Fargo employees desperate to meet sales quotas, both of which are examples of setting the wrong OKRs.

In OKR practices, be careful of what you ask for, because you will get it!

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4.?????? Bad culture - the OKR books don't use this term, but the idea that people would game their numbers reveals an underlying cultural issue. In order for someone to game the numbers, that employee must selfishly think that cheating the organization is the right thing to do. Change the numbers reflects an inherent mistrust between the employee and the organization that the employee feels they should take advantage of - if your employees cheating on their numbers is fair game, you can also assume that they’ll be taking company inventory and materials, being wasteful with their time at work, maybe selling company secrets etc. Falsifying their performance numbers may be the least of your worries!

Solve the cultural/ mistrust issues and no one will game the numbers. Find the fair deal.?

5.?????? Rigid compensation systems - a common objection is that your payroll system is not as agile as our OKRs. Most organizations update/refresh there OKRs on a quarterly basis and the compensation systems are too rigid to be changed that frequently.

We know that we need to refresh our OKRs frequently or we'll miss strategic opportunities, or not react to catastrophic events (like COVID). If we change our strategy, it only makes sense that we changed the compensation system to match that new direction.

If the new strategy is all about gaining new customers, but our Salesforce is being compensated for sales revenue, they will continue selling to their existing customers where they can sell more product in less time.

Again, the solution here is not to keep compensating people for the wrong thing because of a rigid payroll system, but rather build the agility in the payroll system so it can keep up with the organization.

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6.?????? Disconnect between performance and goal achievement - it is possible that an individual/team can achieve some of their OKRs, but be a poor performer, team player, etc. How could that be? OKRs focus on the outcomes, and less how you got that outcome. Correctly structured OKRs not only measure the outcome, but also are we performing within our values/culture and following our procedures. In this example the person might achieve some of their OKRs but not those associated with values or procedures.

The opposite is also possible - our great performer does not achieve their OKR through no fault of their own. Maybe external forces, upstream processes, customer changes etc. As with any compensation system, the actual performance must be seen in context of the broader situation.

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7.?????? Unhealthy competition and sabotage among employees - the result of both poorly structured OKRs and the bad culture may lead to bad behavior. Again, the solution here is to solve those root causes, not avoid the problems by compensating employees on something other than the organization's success.

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8.?????? Discourage risk-taking and innovation - ?This argument assumes that OKRs are set in a way that is too ambitious, unrealistic and inflexible, without any room for experimentation, failure and learning.? Again, the solution here is to solve the cultural and OKR structural problems rather than avoid the issue.

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9.?????? Reduction in collaboration and teamwork - This argument assumes that OKR are set in a way that is too siloed, isolated and individualistic, without any consideration for the interdependencies, synergies and contributions of other teams and stakeholders. This also indicates people are not living the company values and there are underlying cultural issues.

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These cover the objections we have heard over the last few decades of implementing OKRs. If you have experienced other objections, we'd love to hear about them.

?With the concerns we've noted above, you'll see that in every case they do not bear close scrutiny. Each of these concerns is in fact hiding an underlying problem. Those underlying problems need to be solved because they're not only causing problems with your compensation system, but they're also impacting many other parts of your business.

?Linking your compensation system to OKRs makes logical sense, forms the fair deal between the organization and the employee, enables a trusting culture, and is a forcing function to solve these other issues that ultimately impede your organization.

?Compensation systems can be complicated, but they don't need to be. If you wanna learn more about how you can link your OKRs to your compensation system, please contact us.