It might seem intuitive for HR leaders and team managers to tie employee OKR performance with annual evaluations and compensation. While performance management has its place in connection with objectives and key results, it’s important to be fully aware that compensation should specifically not be tied to OKR performance, and that doing so could hinder employee performance and growth.
So what is continuous performance management and how can it work together with OKRs? To start, continuous performance management (CPM) is a newer approach that scraps traditional annual performance reviews and instead focuses on ongoing meaningful discussions between employees and managers that create a culture of purpose, open feedback and personal development.
OKRs drive strategy and execution and when used together, ongoing performance reviews amplify the effectiveness of OKRs and allow for regular check-ins, assessments and can help with course correction. These two methodologies allow for a holistic culture shift at an organization. This is a culture focused on goals that are moving the business forward and how each individual is making an impact, while also making sure feedback and recognition are part of ongoing conversations. OKRs and CPM also connect strategy and goals of the company to the daily work and priorities of individual employees.
So how do you implement continuous performance management? It’s important to have a strong OKR framework that drives business execution before CPM can be embedded into the process. Once an OKR program is established, continuous performance reviews can be used in 1:1s during OKR cycles to encourage employees to stay engaged and on track with their goals.
The first rendition of OKRs was introduced in 1954 by Peter Drucker as “Management by Objectives” or “MBOs.”
MBOs enabled organizations to review organizational objectives, set employee objectives, monitor progress, evaluate results and give rewards.
While MBOs were effective, they tied employee performance directly with financial rewards, which can lead to negative outcomes for both employees and a business.
The need to decouple performance from financial rewards was something former president and CEO of Intel Andy Grove identified several years later and how eventually the OKR methodology we know now was created.
Just so we’re clear, while OKRs can help provide context for performance reviews, they should not be used as the sole indicator of performance. Using OKRs as an employee evaluation tool will hold individuals back, can make them complacent, and can limit their productivity and initiative. This is why Grove decided to decouple rewards from goals when evolving Drucker’s MBO method into the OKR framework. This however doesn’t mean that they can’t be used as context for performance. Managers can use OKRs for added visibility into critical data points to drive calibration, resourcing and appraisal discussions.
We understand performance management is a key component of managing the people aspect of work, but it’s important not to blur the lines between business outcomes, tasks, and personal development.
Drive greater focus by ensuring individuals know what to work on and when.
Create stronger alignment by connecting goals vertically and horizontally across the business.
Increase engagement by motivating individuals to see how their work impacts the business.
Establish accountability and commitment by involving an individual in the process of creating and setting their own goals.
Achieve more by supporting stretch goals that encourage individuals to push limits, take risks and innovate.
Proactively track the impact OKRs have across the organization, enabling management to proactively address risks and manage
change at scale.
Focus on employee skills and professional development by providing an open forum for individuals and managers to discuss personal and professional goals and plans.
Boost morale by formalizing an individual’s recognition and praise.
Support workforce planning and help management identify hiring needs and resource allocation.
Identify employee investment opportunities.
Evaluates employee annual performance against monetary rewards.
Businesses are moving away from traditional performance management practices and adopting this approach of continuous performance management. This shift eliminates extra weight placed on recent events, and instead establishes a culture of ongoing, real-time feedback and discussions centered around employee goals and execution.
When connecting an individual’s accomplishments to a continuous performance discussion, managers are able to decouple OKR achievement from compensation decisions, and instead drive greater focus on employee performance by understanding successes, challenges, and reflections points. These continuous performance discussions are what lead to greater productivity. Leaders should make time for open, frequent discussions with colleagues rather than relying on annual reviews. Giving useful, timely, and ongoing feedback will help employees perform better–and the company too.
OKRs have a deep culture of transparency and alignment, one that runs throughout the organization with a focus on the goals that matter most to the company. If those goals, some of which are aspirational, are tied to compensation, this may prevent employees from feeling like they can set stretch goals if they are unsure if they can achieve them. This can lead to sandbagging, playing it safe, and not encouraging employees to innovate or try new things, due to the fear of failure.
Implementing and running OKRs successfully can take time and practice. If an organization fails to follow best practices or struggles with writing great OKRs, it could lead to individuals or teams not achieving their goals. Again, this may not be a direct reflection on an individual’s performance, but rather an area for adjusting how OKRs are being written, assigned or managed.
Driving performance through OKRs, opposed to compensation, is becoming a necessity.
The traditional model of pay-for-performance is losing its momentum, and as it does, more organizations are needing to rethink the conventional people management strategy, and put a greater emphasis on human capital development. This requires a greater focus on empowering and developing employees.
A study by Willis Towers Waterson reported that only 20% of North American companies find merit pay to be effective at driving higher levels of individual performance at their organization and only 32% said their merit pay program is effective at differentiating pay based on individual performance.
If performance-based pay or incentives aren’t what is driving employees to do their best work, then what is? CEO David Novak believes there’s a tremendous lack of recognition in the world today, something he calls a global recognition deficit, and we couldn’t agree more.
In a recent state of the workplace study, Gallup reports 85% of employees worldwide are not engaged or are actively disengaged in their job. Lack of engagement and autonomy are among the top reasons for employee turnover, further emphasizing the importance these factors play in driving employee motivations.
When goals are being managed and tracked regularly, managers are able to see progress in real time, and refer back to past time periods, to have a better understanding of how an individual is doing, where there can be areas of improvement, and where recognition is deserved. This insight leads to more meaningful conversations, building a culture of transparency and employee engagement.
According to Gallup, actively disengaged employees cause United States companies between $450 billion and $550 billion a year in lost productivity. By increasing a company’s engagement by just 10%, you can increase profits by $2,400 per employee per year.
Companies with highly engaged employees consistently outperform their competitors because their staff is likely to have above average productivity.
Employee engagement is more important now than ever as many teams have gone fully remote. OKRs and CPM keep teams aligned on the most important priorities while also driving a culture of transparency and communication.
There needs to be a stronger emphasis on behavior-based encouragement, and less on integrating compensation with employee outputs.
How will that help drive stronger execution? When the OKR methodology is leveraged correctly, it creates a culture of behavior-based encouragement, one where individuals understand it’s okay to not always max out on a single goal. The very nature of OKR principles encourages employees to push boundaries, innovate, and stretch goals to achieve more than they normally would.
By supporting a goal-execution model that aligns the work every individual and team is doing across the company, employees are given that much-needed recognition, validating them personally with how their work is making an impact.
When employees understand their purpose in the broader context of business priorities, they gain a greater sense of accomplishment. This behavior is further instilled by taking a bi-directional approach to developing performance goals. (Another common best practice to the powerful goal-setting methodology.) When goals start at the top, then incorporate an element of bottom-up planning, employees become more engaged in the goal-setting process, buying into the initiatives they personally need to accomplish, while at the same time deriving a greater sense of accountability.
If you’re looking to use both OKRs and CPM, make sure to start with a strong OKR program first. OKRs are the foundation that employee performance and productivity build upon. A business must first look at how it will drive stronger business performance before considering how to drive greater employee performance.
When you’ve established an OKR program, you can then encourage holistic conversations around accomplishments by having employees reflect on their goals and rate their achievements. By fostering in-depth conversations around performance, challenges and learnings, managers can gain greater visibility around employee performance and drive more meaningful feedback and employee recommendations.
Ultimately, OKRs can offer great input and visibility for performance reviews and increase employee engagement, productivity and growth.
Ally’s performance management tool allows for OKRs and CPM to all happen in one place, so individuals and managers can both see real-time progress of goals, setting a foundation for meaningful ongoing conversations that support employee growth.