Bonuses and OKRs

One of the main benefits of OKR is the inspiring effect of Objectives. Among other things, this is also achieved by the ambition of OKRs: when you set OKRs, you must be sure that you will reach the goal by 60–70% of the target value. That means if you achieved OKR by 60–70%, then you did your work well enough, and if you achieved OKR by 100%, then you did your work exceptionally well.

OKR or Objective and Key Results are a goal-setting methodic which was invented by Intel in the 1970s. It has gone through two rebirths in 1999 and 2017 and is becoming a de facto standard of goal setting in companies worldwide.

One of the most common questions about OKRs is how to connect Performance Management and OKRs. Or even more straightly: how to pay bonuses according to achieving Objectives.

But the trick is that it’s always worth striving for better results, trying something new, and seeking beyond the familiar. And here we come very close to the issue of monetary motivation.

We all know that if an employee’s bonus amount depends on how well the goals are achieved, the employee will consciously or unconsciously lower their targets to a comfortable level to ensure they reach them. Even if we tell them that they will receive a bonus if they achieve 60%, they will just normalize the goal to 60%. For example, if they know they can easily achieve revenue of 50 million and likely even exceed it, under classical KPI, they will set the goal at 50 million. However, under OKR, they will set their target at 84 million and easily achieve 60% of it (approximately 50 million). So, all the ambition we wanted is nullified when the bonuses depend on OKRs.

Some of you may argue, “Well, nothing stops them from trying to earn more!”

1. It really depends on the individual. If the person is naturally ambitious, they will strive for overachievement. Unfortunately, not everyone is like that; others may relax a bit and not aim for higher levels once they reach their target. In this case, overambitious OKRs serve as a psychological trick to stimulate the pursuit of higher achievements. It may not be a 100% foolproof trick, but it still helps.

2. A more critical point is that to achieve significantly more than what’s within the comfort zone, simply working harder is usually insufficient. It requires trying new approaches, taking risks with time and money, and consequently, in case of failure, one may not even achieve those coveted 60–70%.

Therefore, even if we have a highly ambitious employee who works diligently, they will consistently achieve around 80% but are unlikely to ever reach 100%. Simply because they will be afraid to take significant risks and try something new. So, in effect, instead of OKRs, you get the traditional KPIs, and bonuses you will pay for reaching 60%, not the usual 100%.

On the other hand, if we detach bonuses from the percentage of goal achievement, the same ambitious employees will be willing to take bold experiments. What can this lead to? Sometimes they may achieve only 40% of the OKR simply because not all their experiments will be successful, but other times they may skyrocket to 180% due to growth-oriented approaches.

1. How do we motivate people to work most effectively?

2. How do we handle bonus payments then?

Researchers such as Peter Drucker, Carnegie Mellon University, and many others already addressed both of these questions in their studies, even in the last century, but I’ll provide a brief summary.

Studies have shown that monetary motivation works well only for tasks that are fairly mechanical and don’t require a highly creative approach. For example, it can work in assembly line work following instructions, or scripted sales. But when it comes to creating new products, conquering significant market parts, and similar cases, the approach “just work harder” unfortunately doesn’t work.
In such situations, non-monetary — intrinsic — motivation works better. In Dan Pink’s book “Drive: The Surprising Truth About What Motivates Us” identifies three major factors: inspiring purpose, autonomy, and mastery.

The OKR system indeed strongly supports the first two factors.
“OKRs should inspire employees to achieve and help them understand how and what their goals impact when achieved.
The approach of bi-directional goal-setting, where teams independently set 60% of their objectives, ensures the autonomy factor for these teams.
At this point, any experienced manager may wonder: “I’ve provided intrinsic motivation, but the employee still underperforms. How can OKR help me?”
OKR won’t help in such cases… However, the problem is that de-bonusing won’t help either.
In such situations, I always meet with the employee one-on-one and try to understand, in a trusting conversation, what the reasons might be. The reasons can be very diverse, but in most cases, it’s within your power to address these issues or assist the employee in resolving them. For one of my employees, a series of three conversations led to a 20-fold increase in productivity, and this was a programmer, not a salesman.

If we’ve addressed motivation, how do we handle bonus payments?Twice a year, OKRs were synchronized between business blocks.

On the other hand, in some industries, regular bonuses are a part of the compensation package. If we say that we’re detaching bonuses from goal achievement, the simplest approach is to include bonuses in employees’ salaries and not bother either ourselves or the employees with it. One big European bank, for example, did just that in 2017.

According to research, the only way to pay bonuses that can increase motivation for creative work is to pay them immediately after the goal is achieved, without waiting for the end of the quarter. However, never promise bonuses in advance. In other words, if the employees’ work has generated some extra profits that weren’t anticipated beforehand, it’s worth rewarding that. In general, there are many successful companies on the market that never pay bonuses and still don’t face problems with employee motivation.

There’s still the annual bonus, which depends on the financial performance of the company. Here, too, it’s straightforward: some portion of the company’s profits is distributed among employees proportionally to their salaries.

I know that it’s challenging for many managers to embrace the approach of abandoning bonuses as a way to motivate employees, because it is so simple: you manage employee motivation by pressing buttons in an accounting program, almost like in a computer game.

The problem is that such an approach is highly ineffective, and even if you see that an employee has become more efficient after de-bonusing, it could simply be a result of them learning how to manipulate the metrics you use to measure their performance. It’s essential to understand that knowledge workers are quite inventive and readily share hacks with each other on how to cheat the system, especially if they perceive the system as unfair.

Conclusion:
Without this bonus tool, more attention needs to be given to setting and communicating inspiring goals to employees, more one-on-one meetings, and enhancing communication and psychology skills. But it’s worth it. The results are genuinely qualitatively different.

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