Linking OKRs to incentives and compensation: Navigating the complexities and exploring the solutions

This article is co-authored by Ben Lamorte (from USA) and Paul Barker (from South Africa). During the writing of this piece, we’ve realised the approach to pay and compensation differs quite a bit between these countries. Although we’ve tried to keep the concepts generic, this piece specifically is slightly biased towards the South African approach.

Motivating employees through bonuses and long-term incentives is often seen as the only viable solution to drive performance and achieve strategic goals. But is there a better way? Introducing Objectives and Key Results (OKRs) into this mix can add layers of complexity. The commonly accepted principle is: “Don’t link OKRs to incentives” – primarily because doing so results in low targets that game the system to ensure bonuses are paid rather than stretching the organisation to achieve amazing results. However, it might not be that simple.

Understanding the potential challenges and solutions can help organisations navigate the catalytic shift that OKRs bring.

The starting point for the integration journey of these two elements (OKRs and long-term incentives) will depend on the type of structures organisations have in place. Below, we describe three common structural maturity phases.

Option 1: Teams that have no formalised incentive structure

Some organisations operate without formal incentive structures. This could be because of the stage of the company – for most early-stage companies, there are no profits to share and hence no incentive structure. Or some companies simply provide pay and benefits only, and it’s known and accepted as part of an employment contract.

In cases where there are profits to share but just no formalised structure, we find that incentives are typically paid based on discretion and through discussion. For these companies, integrating OKRs is relatively straightforward as there is no existing incentive system to reconcile. The focus can remain solely on aligning efforts with strategic goals without the added complexity of tying performance to financial rewards.

We often find that these organisations are led through organic discussions; in effect, a leader and their team members would have detailed and frank discussions about strategic goals, contributions and bonuses.

This is a great approach and often preferred to increase candid discussions between team members, provided there is a foundation of trust between individuals in the team.

Option 2: Teams with existing incentive structures that want to introduce OKRs

For organisations that already have incentive structures in place, introducing OKRs requires careful consideration to avoid conflicts and ensure alignment.

As an example, sales teams often have individual incentive structures, where incentives are based on a combination of company, department and individual performance. Introducing OKRs in such environments can lead to potential duplication or misalignment if not handled carefully. Here’s how to approach this:

1. Use caution with departmental OKRs (think about what makes “a team”): OKRs should not necessarily be split by department. Department-level OKRs have a tendency to create a silo-mentality in the organisation. Rather, OKRs should highlight the main initiatives that the organisation should work on, cross-functionally. This approach makes the links to incentives less explicit and focuses on broader strategic alignment. We’ve not seen an effective use case in which OKRs are simply set at each department based on the org-chart structure other than in small companies, typically with less than 50 employees.
2. Avoid individual-level OKRs: In all cases, individual-level OKRs should be avoided for a range of reasons (most notably that it looks like a task list and rarely drive outcomes). Even Google, who originally aggressively supported the “cascading” of OKRs to individuals, have admitted that it’s not an effective approach.
3. Think “strategic change”: Strategy is (most often) about changes that need to be implemented in the organisation. Hence including standard revenue targets as OKRs might not be the right approach. Rather, think about what are the strategic changes that need to be seen – are there specific types of revenue that need to be unlocked or increased? If so, include these as OKRs.
4. Allow duplication but enforce alignment: There could be duplication across OKRs and whatever is being tracked through the long-term incentive structure. This shows that there are adequate rewards for meeting OKRs. Whether there is duplication or not is not important. What is crucial though, is to ensure alignment. Once OKRs are drafted, ensure they don’t contradict what is on the scorecard.

Update incentives: When implementing OKRs, it’s often necessary to update existing incentive structures to reflect the new focus and avoid any conflicts. OKRs is a change in the way the business operates, and it might require a change in what is incentivised.

Option 3: Teams that want to introduce OKRs as the incentive structure

Some organisations consider using OKRs directly as their incentive compensation system. This approach is generally discouraged. The reasons stem from two areas.

Firstly, the view on incentives. Incentives are mostly awarded to individuals, and if OKRs are used as the incentive structure, it would require individual-level OKRs (which we’ve covered above).

Secondly, the view on strategy. Organisational strategy points the team in a certain direction – it’s directional, not deterministic. Even though the direction is known, the path to get there is unknown.

This is why OKRs exist—to explore the paths to get there. The way we consider incentives needs to give us freedom to do so.

If we fail on our OKRs, we don’t want to be penalised if we still get to our destination at the end of the longer-term period.

When linking OKRs and incentives, you sit with the following challenges:

• It creates the wrong behaviour (described above)
• It’s not linked to the same time period (e.g. quarterly OKRs vs. annual incentives)
• There is a need for agility in OKRs (OKRs might need to change as we learn more)
• Sometimes the metrics don’t exist yet and we require baselines to be set in OKRs.

And so although possible, it’s highly discouraged to use OKRs as the incentive structure.

If not through financial rewards, how do we motivate employees?

It comes down to culture. Some organisations operate in cultures where employees are purely motivated by financial rewards, and they drive these extrinsic motivators. However, research has shown that extrinsic motivators are not sustainable.

Cultures that encourage intrinsic motivation (i.e., working to progress the organisation’s purpose) are more prone to using OKRs to contribute to driving the strategy forward. If the workplace is solely about money, it might be a sign to rethink the cultural foundation.

However, OKRs alone cannot change company culture. Incentives should be designed to support and enhance intrinsic motivation, focusing on rewarding behaviours that drive alignment, cooperation and integration, rather than purely progress on strategic goals.

An example

A balanced approach is essential when organisations introduce both OKRs and a new incentive compensation system. After all, if OKRs do not connect in any way to performance, there will always be someone who will ask the question – and likely many others who will feel this way but remain silent – “How can you say OKRs are the most important goals to achieve if they are unrelated to my bonus?”

One company we’ve encountered uses a hybrid model linked to a combination of financial metrics and OKRs. They would, for example, create a bonus system in which 90% of the bonus is tied to profit-sharing and pure financial metrics, and 10% is linked to team-level OKRs. The nuance is that the team-level OKR performance component is paid out at either 0%, 5% or 10% depending not on the actual levels of achievement on KRs, but rather an informal 1:1 discussion between manager and direct report that assesses 2-3 items depending on the original impetus for deploying OKRs such as:

1. Which KR did you contribute to and how?
2. How did you leverage OKRs to improve alignment outside our team?
3. How did OKRs help you focus and shift priorities to our most important strategic goals?

In practice, nearly everyone who had the documented OKRs discussion got the full 10%; however, by including a specific bonus component tied to OKRs, it sent the signal that OKRs are super important.

This model ensures that incentives are aligned with both company performance and strategic goals at the team level.

The challenge is that often, meeting OKRs during this cycle might not have resulted in increased revenue in the same cycle (due to their strategic nature). This would lead to cashflow challenges.

In this case, companies must commit to setting aside funds for bonuses, even if it affects cash flow, demonstrating a commitment to long-term strategic goals.

In essence, while OKRs should not be the sole basis for bonuses, they can be part of a broader incentive structure.

Embracing comprehensive incentive structures

When designing incentive systems, it’s crucial to recognise that there are many parts to a broader framework. Bonuses, long-term schemes, OKRs, conversations, contributions and market dynamics all feed into the incentives.

Avoid creating a culture where employees only focus on tasks linked to their OKRs for bonuses. Rather consider their level of participation in writing OKRs, the impact it had on their focus and alignment, and how employees leveraged OKRs to improve their job performance.

Then design incentives to encourage the desired behaviours, not just hitting numerical targets. Recognise and reward qualitative stories, even if it means adjusting or discarding key results during the journey.

In summary, while linking OKRs to bonuses and long-term incentives introduces complexity, thoughtful design and implementation can ensure alignment with strategic goals, foster intrinsic motivation, and create a positive company culture. By balancing quantitative and qualitative assessments, organisations can develop incentive structures that support both individual and collective success.