It’s hard to write this title and expect everyone to agree with the headline. But. “Yes, OKRs (Objectives and Key Results) should not be tied to variable pay in your company.”
Because of the way we have been working in the last century, saying this is quite similar to Maria Montessori explaining that the student arrives in the morning and of his own accord chooses to do differential equations. If you have lived through the traditional education system, you basically don’t believe it.
Going to the origin of the question, the variable payment or the expected bonus at the end of the year, is generally implemented with the aim of encouraging the team to work harder and better.
This follows what professors Michael Jensen and William Meckling described in 1976 as the Agency Theory. Where they asked themselves the following:
Why don’t the directors of a company behave in the best interest of their shareholders?
The following sentence summarizes their conclusion:
“People work according to what you pay them for their work”.
A simple statement that I am sure many of you share, but which completely forgets a series of relevant anomalies, such as, for example, the titanic work carried out by health workers in times of pandemic, or the sacrifice of teachers, missionaries and educators working in the poorest parts of the world…. Or something closer to a traditional organization like your company, where trained and educated professionals know that they would have much better pay the next day if they changed jobs and left the army or the fire department.
So, suddenly, this sentence stating that your team works according to what you pay them, becomes lame and needs to be reinforced. This is where Frederick Herzberg comes in with his “Two Factor Theory” (👉 here his book “Motivation to work” and here 👉 one of his great talks full of smoke and jokes from the 70’s).
Hygiene factors and motivating factors
Building on Maslow’s theory, Herzberg establishes two groups of factors necessary for a team to work motivated; hygiene factors and motivating factors:
Hygiene factors, will refer to everything related to salary, having what is commonly known as “a good boss”, a nice, clean office, security in your workplace, certain policies that allow you to work better, etc. What makes Herzberg different is that he understands that hygiene factors are essential to motivate your team, but above all because the absence of each of them generates dissatisfaction and demotivation. A mathematician, would express it as a necessary but not sufficient condition of motivation (where ∃A⇏∃B) .
Put another way, no matter how much I increase the hygiene factors of a member of my team, there will come a point where there will no longer be room to improve his or her motivation.
However! There are other elements called Motivating Factors. The more they are enhanced, the more motivation and, therefore, alignment will be generated in the team. These are: Having a constant challenge at work, having recognition within the teams, being responsible for the company’s progress, being able to make an impact on your day-to-day and growing as a professional (learning and developing your skills).
From another perspective, hygiene factors are those whose absence or scarcity generates frustration and whose excess, on the contrary, will not produce a relevant marginal increase in team motivation. And motivating factors are those that your team will want, and will “never” have enough of, and so gradually increasing them will mean greater team motivation.
The brilliant thing about Andy Groove’s vision is that OKRs incorporate all of these motivating factors into their methodology and take hygiene factors for granted.
Notice how all the pieces fit together when you see that:
- OKRs must be ambitious, so if you achieve 100% of your goals, you are ultimately losing motivation, and you will need to find challenging work sooner or later.
- OKRs must be transparent to the entire organization, and that’s how your team will receive the recognition it needs to be motivated.
- OKRs start at the company’s mission and end at each individual’s task, so your team feels accountable for their work.
- OKRs use Key Results as a key piece to measure the outcome of the work, so your team understands the real impact of their day-to-day work in something as simple as a number.
- OKRs reward learning and experimentation, so if a team achieves 30% of the goal, it’s good if they learned enough to get closer to the company’s mission at the next milestone. In this way you encourage the professional growth of each individual.
Variable compensation and OKRs
And here comes the Master touch, attention…. For these five points to work properly, as the title of this post said, “you must separate variable compensation from the scheme of your OKRs”, because if not, you will remove from the equation much of the ambition that an employee seeks, limiting the learning they need to grow, and the impact of their day-to-day will take a back seat. I developed these concepts in this Twitter thread where I explain what happens when “Goals go wild”.
At this point, I hope you see the point of “divorcing the bonus from the OKRs” as John Doerr says in his book Measure What Matters, but you may also be asking yourself, what do I do with the variables? Do I eliminate them?
My answer is… NO!
You must understand bonus pay, as an element in the performance evaluation of each employee, but NOT as an element in team management. In fact, although John Doerr talks about a divorce between OKRs and bonus, I would say it is more like an amicable separation. If the two schemes are well thought out, there will always be a shared area between the two.
You can have the case of an employee who is key to the fulfillment of the OKRs, but who does not get a high variable, despite being a Key Employee, and on the contrary the case of an employee who always has 100% of the variable but does not contribute to the fulfillment of the OKRs and therefore someone to be questioned within the team.
Finally, here is a case that exemplifies this conflict very well:
A company has two employees Susan and Maria:
- Susan is very smart, she loves the company and focuses on results, above all she likes to meet 110% of the objectives and earn a lot of money as a reward for her hard work.
- Maria is also very smart, she joined the company passionate about the Mission they had to accomplish and focuses on results for everyone. She is motivated by seeing the team’s achievements and knows that if she works like that, the rewards will come.
After a year of hard work:
- Susan achieved 120% of the variable she had hard negotiated a year earlier with her managers. She feels rewarded and valued and next year, she will negotiate again for a good variable.
- Maria, however, was left with 80% of the variable, and her boss is happy with her performance. She always pushes the whole organization to excel and strives to make the company better and better. She is happy but wonders if she has done her job well and if she shouldn’t be a little more selfish in her day-to-day work.
This is the classic example of perversion of objectives that OKRs try to avoid. This is why it is key to separate the OKRs team management tool from the tool that evaluates their performance and compensation.