OKRs in Human Resources, Incentives, and Performance Management

“How can OKRs be used in HR development, and how can incentives (bonus payments) be linked to OKRs?”

This question inevitably arises when a company delves deeper into OKRs (Objectives and Key Results).

Setting goals, creating transparency, measuring progress, and responding flexibly to changes are some of the many advantages of OKRs. (More on this in the article: The Advantages of OKRs).

One of the most common questions is how to use OKRs for annual goals, bonus regulations, incentives, or in general, linking them to people development and performance management.

Many hardcore OKR fans immediately say,

 “No, that’s not possible. You should never combine OKRs with HR development or even performance management. It just doesn’t work.”

In this article, I am going to shock these OKR hardcore fans and provide a response that aligns with the realities of the business world.

Do OKRs and HR Development Fit Together?

OKRs can be highly effective in HR, especially for performance development. The continuous OKR feedback loops between employees, teams, and departments ideally foster employee growth. 
In terms of “committed goals,” (for instance, to achieve a certification or master a specific skill) incentives such as bonus payments could be linked to an objective. 

However, this connection is not sensible with “challenging/aspirational goals” – the hallmark of OKRs.

One remark: The value and effectiveness of the traditional approach to performance management is a heated topic amongst HR experts. Multiple studies question the traditional way. They show that simply measuring employee performance is generally counterproductive. 

For instance, GE (General Electric) has scrapped its previously “gold-standard” performance management system and now relies on continuous feedback and performance development.

What Does This Mean for OKRs in HR?

Assumption: OKRs are generally used for planning but not in HR

Let’s assume we have some form of people development in which specific goals are agreed upon with employees or teams. Training and other development measures are defined, and perhaps “rewards” are tied to them. We assume, that these goals are defined between employees and manager/HR, but they are not formalized as OKRs.

Now, let’s assume that all employees in the company use OKRs to guide their work.

What happens when employees have OKRs for their projects/regular work and additional (personal) goals that are not reflected in the OKRs?

In the worst-case scenario, the OKRs and the individual development goals might even contradict each other!

Employees will either focus primarily on their personal goals (especially if linked to financial incentives) and only then on the OKRs. 

Or they focus on the OKRs, and during performance reviews they argue, “Well, I couldn’t focus on my personal goals because the work goals were more important.”

This conflict of interest arises whenever different goal systems are in place.

That’s why OKRs and HR development must be aligned.

How OKRs Support HR and People Development

Let’s briefly review the basic principles of OKRs:

• Absolute transparency regarding the goals and interim results to be achieved
• Continuous updates on progress made
• Regular, usually bi-weekly, discussions between employees/teams and supervisors about goals, progress, and any necessary adjustments
• Goals set for manageable timeframes (3 months) and re-defined after each cycle
• Goals are either committed or aspirational 

And the distinction of goals is crucial when it comes to HR development.

Committed OKRs (Must-Goals)

On the one hand, “must-goals,” i.e., goals that absolutely must be achieved, can be defined. These are also known as committed OKRs.

Here, 100% of the goal must be achieved.

Such goals can also be linked to employee or team success as part of their development. Whether incentives such as money, company cars, training, promotions, etc., are awarded at the end is up to the company.

By the way, you can define “must-goals” without dangling the incentive carrot. In fact, that’s even preferable…

Must-Goals and People Development

It is generally advisable in people development to focus on actual growth. Not just rigidly on achieving 100% of goals.

However, there are situations and tasks where 100% success is absolutely necessary:

• A sales team must generate a certain amount of revenue
• A production team must deliver the ordered number of products within the agreed quality and time frame
• A cleaning team must clean a train within a set time frame so that it can depart on time

Such goals can also be formulated as OKRs.

And these goals can also be used as criteria for people development.

If a company already has a culture of setting goals and now introduces OKRs, this transition is relatively straightforward using must-goals, i.e., committed OKRs.

Employees will appreciate OKRs since progress is continuously monitored – instead of waiting until the end of the year to determine if a goal was achieved.

Moreover, committed OKRs offer the flexibility to adjust annual goals to current developments, ensuring that employees remain motivated to work toward their goals.

Ambitious Goals and OKRs

Ambitious goals must not be directly linked to people development.

The flagship of OKRs is the definition of “ambitious, challenging goals.”

These OKRs are considered successfully worked on if, at the end of a quarter (the usual planning horizon for OKRs), 60-70% of the goal is achieved.

Here, it is not possible to directly link goal achievement to “employee success.”

Therefore, it is entirely inappropriate to connect these ambitious OKRs to incentives directly.

The consequence would be that employees either:

• Water down their ambitious OKRs (make them less demanding) to ensure they can be achieved (which defeats their purpose), or
• Spend time arguing that they “definitely achieved 70% of the goal and therefore deserve the incentive” (and since ambitious goals are often challenging to measure concretely, it becomes difficult to prove precisely how much progress was made).

However, this does not mean we should ignore ambitious OKRs in people development.

Quite the opposite!

Often, ambitious OKRs require not only concrete results like a delivered product or revenue generated, but they also necessitate new behaviors, the development of new skills, or leaving the previous path.

Since people development naturally (or even primarily?) aims to develop new skills, we can use OKRs as a guide to assess how far an employee has progressed in this development. Using this progress as a basis for planning further employee development is both possible and meaningful.

But once again, explicitly:

Ambitious OKRs, where achieving 70% is considered a success, should not be directly linked to incentives.

Conclusion: OKRs and HR Development

If a company (or team) uses OKRs for goal setting at the day-to-day work level, there must be a connection between people development and OKRs.

And in this context, it is crucial that only committed OKRs (“must-goals”) can be directly tied to incentives.

OKRs are the perfect tool for bringing employee management through goals into the agile world AND creating the transition to continuous HR development (and saying goodbye to the once-a-year performance management at the annual review).

If you would benefit from working with an OKR expert to implement OKRs or improve the OKR alignment in your organization, have a look at our OKR consulting services: https://www.targetter.com/okr-goal-setting-consulting/