You cannot use a Key Result for both Navigation and Compensation at the same time.*
Let’s face it, OKRs (Objectives and Key Results) are a great tool, but they cannot do everything… or can they?
As a quick reminder, OKRs are a technique for taking your organization’s strategy and cascading it down to what teams and individuals need to do daily/weekly/monthly to achieve that strategy.
OKRs are taking technology companies by storm as they are (finally) putting the hard work of developers into context – so they can see how they contribute to their company’s success.
They have recently crossed the chasm into main-stream corporations as they effectively transform the huge corporate entity into manageable ‘bit-sized’ pieces in which meaningful work can get done.
The Benefits of OKRs
In all organizations, they do a bunch of awesome things, including:
- Creating alignment across the organization for better results with less effort.
- Committing departments, teams, and individuals to priorities and performance levels.
- Surfacing natural cross-functional teams for better execution.
- Tracking progress for accountability.
- Stretching the organization for amazing results.
"OKRs cannot be used for compensation" - John Doerr
But if you read John Doerr’s book, Measure What Matters, you are told that you cannot use an OKR for compensation purposes. That kind of defies logic – How can an OKR capture what you need to do to contribute to the company’s success but your OKRs cannot be used in assessing your contribution towards strategic success? John’s perspective does not make sense. Or does it?
Our field-research has proven that there are six types of OKRs – Valuation, Navigation, Compensation, Calibration, Communication, and Regulation.
The Six Types of OKRs
The whole idea of OKRs is that they are a Navigation tool. They help us make day-to-day decisions about “Do we turn left or right?” … “Do this or do that?”. As such, navigational OKRs need to use leading indicators. Key Results that predict future performance so that we can make decisions today to enable a better tomorrow.
Characteristics of a great navigational KR include:
- Relevant – The metric should be closely related to actual performance, across normal scenarios.
- Predictive – Provides insights into the most likely future outcome.
- Actionable - Covers areas that the associated person/people have the authority, competencies, and resources to act on towards delivering performance.
- Vivacity - Does the measure inspire, engage, and allow for team/individual contribution?
On the other hand, Compensation tools need to use lagging indicators. Indicators that accurately measure what has occurred, after all, it is appropriate that we get compensated for what has been accomplished, not what might be accomplished in the future. Not only that, but there are a number of other criteria for a “fare-deal” compensation system that would cause navigational OKRs to fail, including:
- Compensation measures should be S.M.A.R.T. The “A” in SMART is “attainable”, but great OKRs are aspirational, they cause us to stretch – and are not intended to be attainable. Achieving just 70% would be great.
- Consistent across time – you cannot keep on changing one’s compensation metrics – they are usually frozen for the year, yet Key Results and targets are usually changed every quarter.
- Auditable – the numbers in your compensation system need to be validated by external sources, to ensure no one is ‘gaming’ the compensation system, yet OKRs are often softer measures that would fail an audit.
Heisenberg may have agreed with John Doerr
Enter our good old friend Heisenberg. Anyone who remembers their high school physics (or watched The Big Bang Theory) knows that Heisenberg’s Uncertainty Principle says that you cannot measure a particle’s velocity and position at the same time.
Applied to OKRs, his principle would say something like:
“You cannot use a Key Result for both Navigation and Compensation at the same time”
“A Key Result cannot be a Navigational Key Result and Compensation Key Result at the same time”
In either case, the issue is that the characteristics of great navigational KRs vs. those of great compensation KRs make it tough, but not impossible, to find KRs that pass both check-lists. But even if you could, the deal-breaker is the target. Best practices for OKRs are to use ‘stretch’ targets (‘aspirational’). These are targets that if you achieve even 70%, it would be awesome. You cannot use these stretch targets as part of a “formula-based” compensation model because of the ‘elasticity’ of actual performance.
The above are the points that would make Heisenberg’s OKR Uncertainty Principle a reality.
* NOTE: What Heisenberg actually said was along the lines of "Uncertainty principle, also called Heisenberg uncertainty principle or indeterminacy principle, statement, articulated (1927) by the German physicist Werner Heisenberg, that the position and the velocity of an object cannot both be measured exactly, at the same time, even in theory. The very concepts of exact position and exact velocity together, in fact, have no meaning in nature." Source https://www.britannica.com/science/uncertainty-principle