All You Wanted to Know About OKRs But Were Afraid to Ask :-) (A Behavioral Scientist's View on Performance Management Systems).

Performance appraisal systems are a crucial element in companies, enabling the measurement and evaluation of employee performance. Currently, two popular frameworks for setting and tracking goals are OKR (Objectives and Key Results) and KPI (Key Performance Indicators). Despite their widespread use, especially since the emergence of OKRs, workplace confusion related to these two systems is common.

What are OKR and KPI?

OKR is a goal-setting framework based on defining Objectives and Key Results that will lead to achieving those objectives. On the other hand, KPI is a metric used to track success in achieving a specific goal.

Setting goals within an OKR system requires clearly defining desired outcomes that are measurable and attainable. Objectives should be ambitious yet realistic to ensure employee motivation. It is crucial to ensure that goals align with the company's vision and strategy.

KPIs are metrics that allow tracking progress toward goals. They provide objective data about employee and overall company efficiency and success. KPIs are often used for decisions regarding rewards, employee promotions, or reallocating resources to or from a project, for example.

What is the correlation between KPI and OKR?

There is a strong connection between KPIs (Key Performance Indicators) and OKRs (Objectives and Key Results) within a performance appraisal system. While these terms are distinct, they are interconnected and typically used together to achieve company goals.

KPIs are measurable indicators used to track success in achieving specific goals. They are usually based on quantitative data and allow for objective measurement of progress or achievement. KPIs are closely linked to the concrete results a company wants to achieve.

OKR, on the other hand, is a goal-setting framework based on defining Objectives and Key Results that will lead to achieving those objectives. Objectives are more general and broader, while Key Results represent measurable and concrete steps toward achieving those objectives.

KPIs and OKRs are interconnected because Key Results in an OKR system are usually defined based on relevant KPIs. KPIs provide concrete performance and results data, while OKRs set the direction and vision for a company. Key Results in OKRs are often set to be measurable using specific KPIs to track objective achievement.

Combining OKRs and KPIs enables a company to set clear goals, define success metrics, and track progress. KPIs provide concrete measures for tracking, while OKRs provide context and guidance for achieving those measures. This combination allows companies to focus on achieving results and success based on defined goals.

Where did OKRs as an evaluation method come from?

OKR (Objectives and Key Results) as an evaluation method originates from the technology industry, specifically from Intel and its former executive director, Andrew Grove.

OKR was first implemented at Intel during the 1970s and has since spread to other technology companies like Google, LinkedIn, and Twitter. OKR became popular in these companies due to its simplicity, focus on achieving goals, and transparency.

OKR is based on the idea of setting clear Objectives to be achieved, together with measurable Key Results that show progress toward those objectives. Objectives are general and ambitious statements about what the company wants to achieve, while Key Results represent concrete metrics used to track progress toward those objectives.

The advantage of OKR is that it sets clear guidelines for achieving goals and provides metrics that can be tracked to evaluate progress. OKR also encourages a focus on results and agility in adapting goals to changes in the environment.

Due to its success in the technology industry, OKR has become popular outside of that industry and is applied in various companies as an effective tool for achieving goals and tracking performance.

Why were only KPIs mentioned until recently, and now we have OKRs?

Although OKR as a concept has existed for a long time, it has recently become more popular and frequently mentioned in the context of evaluation and performance management systems. The reasons for this can be attributed to:

• Promotion of agility and flexibility: The OKR approach emphasizes setting ambitious goals and focusing on achieving results. In today's rapidly changing business environment, companies increasingly recognize the need for an agile and flexible approach to performance management. OKR provides a framework that can quickly adapt to changes and priorities.
• Companies and influencers: Companies like Google and Twitter have publicly highlighted their use of OKRs and achieved significant success using this approach, which attracted the attention of other companies that wanted to use similar methodology to achieve goals and improve performance.
• Need for results focus: KPI (Key Performance Indicators) is a long-standing concept used to measure performance and results. However, some have recognized that KPI alone can be insufficient because it may focus only on measuring results without a clear orientation towards objectives and achieving results. The OKR approach complements KPI by focusing on setting Objectives and Key Results that will lead to achieving those objectives.

Practical comparison

• OKR (Objectives and Key Results): Objective: Increase user count by 20% in the next half-year. Key Results: Increase registered users by 15%. Increase average time spent on the platform by 10%. Increase user conversion rate to customers by 5%.
• Objective: Increase user count by 20% in the next half-year.
• Key Results: Increase registered users by 15%. Increase average time spent on the platform by 10%. Increase user conversion rate to customers by 5%.
• Increase registered users by 15%.
• Increase average time spent on the platform by 10%.
• Increase user conversion rate to customers by 5%.

In this example, the objective is clearly defined and ambitious – increasing the user count. The key results are measurable and focused on achieving that objective, such as increasing registered users, extending time spent on the platform, and improving the user-to-customer conversion rate.

• KPI (Key Performance Indicators): KPI 1: User-to-customer conversion rate. KPI 2: Average transaction value. KPI 3: User retention rate.
• KPI 1: User-to-customer conversion rate.
• KPI 2: Average transaction value.
• KPI 3: User retention rate.

In this example, the focus is on measuring key performance and results. KPIs are defined as indicators used to track company performance in specific areas, such as user-to-customer conversion rate, average transaction value, and user retention rate.

In comparison:

• OKR focuses on achieving Objectives through concrete Key Results, which are often specific and measurable.
• KPI focuses on tracking key performance and results through specific measurable indicators (THERE IS NO BROADER PICTURE OF WHAT THE EMPLOYEE ACTUALLY DOES).

The main difference is that OKR sets objectives and key results geared towards achieving those objectives, while KPI focuses on tracking performance in specific areas. However, OKR and KPI are not, as stated, mutually exclusive and are often used together to ensure comprehensive performance monitoring and achievement of company goals.

Example of combined KPI and OKR usage

Objective: Increase sales revenue by 15% in the next year.

Key Results:

• KPI: Visitor-to-customer conversion rate. Increase conversion rate from current 2% to 3% by year-end.
• Increase conversion rate from current 2% to 3% by year-end.
• KPI: Average transaction value. Increase average transaction value from $100 to $120 by year-end.
• Increase average transaction value from $100 to $120 by year-end.
• KPI: Number of new users. Increase the number of new users by 20% compared to the previous year.
• Increase the number of new users by 20% compared to the previous year.

In this example, the objective is set as increasing sales revenue, and the key results are measurable KPIs focused on achieving that objective. Visitor-to-customer conversion rate, average transaction value, and number of new users are KPIs that will be tracked to evaluate progress toward the revenue increase goal.

Why are OKRs even better?

OKRs are very important in the context of employee engagement. I touched upon employee engagement issues in this article, and in that context, OKRs can be said to have a connection with employee engagement.

Employee engagement using OKRs can be encouraged for the following reasons:

• Clearly defined goals: OKR emphasizes setting clear and inspiring goals that employees can understand and connect with. When employees clearly know what they need to achieve and how their work will contribute to those goals, this can increase their motivation and engagement (AN ANSWER TO THE ETERNAL QUESTION OF ALL QUESTIONS: Where do I fit in?).
• Sense of purpose and contribution: OKR helps build a connection between individual employee goals and the company's broader objective. When employees see that their work has meaning and contributes to achieving important goals, this can result in greater engagement and a sense of satisfaction.
• Transparency and progress tracking: The OKR system usually includes transparency and regular tracking of progress toward set goals. When employees clearly see their progress and receive feedback on their results, this can foster a sense of achievement and motivation for further work.

On the other hand, KPIs alone will not increase employee engagement. KPIs are primarily focused on tracking performance and results, but not necessarily on creating a sense of purpose and connection to company goals (LACK OF SENSE OF BELONGING – ARTICLE ON EMPLOYEE ENGAGEMENT). KPIs can be useful in tracking performance, but if they are not linked to clear goals and are not transparently communicated, they can remain just numbers without (special) meaning for employees. Aside from financial, and benefits cannot be the only motivation, or at least not for long).

It is important to note that employee engagement depends on many other factors and that OKR or KPI are not the only factors influencing it. Organizational culture, leadership, work environment, and other factors also play an important role in fostering employee engagement.

Can OKRs also be used for offboarding?

Although the OKR system can be a useful tool for goal setting and performance management, its application and impact on employees depend on many factors, including organizational culture, leadership, and communication. In some situations, if an employee cannot identify with the company's mission and vision, OKRs can further emphasize the misalignment and potentially contribute to an employee's departure from the company 🙂

Does it make sense to divide OKR into three parts: corporate, team, individual?

Yes, OKR is often divided into three levels, which can serve the purpose of team homogenization and proper distribution of knowledge, rights, and responsibilities: corporate, team, and individual. Each level has its purpose and contributes to aligning goals at all levels of the company.

• Corporate OKR: Corporate OKR refers to the objectives and key results set at the company-wide level. These are high-level goals that reflect the company's mission, vision, and long-term objectives. An example of a corporate OKR might be increasing market share for a specific product or service.

• Team OKR: Team OKR focuses on achieving the goals of teams within the company. These goals are aligned with corporate OKRs and should support their achievement. An example of a team OKR might be improving customer satisfaction for a specific team or increasing team productivity.
• Individual OKR: Individual OKR focuses on the objectives and key results set by individuals within teams to contribute to achieving team and corporate OKRs. These goals should be aligned with team and corporate objectives. An example of an individual OKR might be successfully completing a specific project or developing specific skills and competencies.

Dividing OKRs into these three levels enables goal alignment at all company levels and, most importantly, team homogeneity. Corporate OKR sets the direction and vision for the company, team OKR focuses on achieving those goals at the team level, while individual OKR connects individual work with team and corporate goals. This hierarchical structure allows for clarity, focus, and connection between different levels within the company, which is especially important today.

It is important to note that it is crucial to align OKRs at all levels and ensure that there is a cascading propagation of goals from top down, to ensure consistency and alignment of goals at all levels of the company.

KPIs are traditionally used to measure performance at various company levels, but such an appraisal system does not allow for cascading goal setting. KPI is often used as a way to track results or achievements, but mostly without a clear hierarchy between different company levels.

OKR, on the other hand, can provide a structured framework that allows for cascading goal propagation. Setting goals at all levels (corporate, team, and individual) is linked to the company's mission and vision, enabling clear alignment and connection of goals. OKR provides the flexibility for goals to cascade from top down, to ensure consistency and alignment of goals at all levels.

This "cascading" capability can facilitate understanding and alignment of goals at all company levels and create a clear direction from company goals to each individual. Yes, the employee again gets an answer to the question "where do I fit in?", has a sense of belonging, and more easily finds meaning and purpose in what they do, which inevitably increases engagement.

Maslow and OKR

Maslow's hierarchy of work needs is a theory describing the hierarchical structure of human needs in the context of work and motivation. According to Maslow's theory, people have different levels of needs ranging from basic physiological needs to higher psychological needs.

Cascading goal setting in an OKR system will help the employee "climb" or progress through the levels of Maslow's hierarchy of needs toward self-actualization (What a man can be, he must be).

• Need for belonging and social needs: This level of needs refers to the need for belonging, social connection, and interpersonal relationships in the workplace. Cascading goal setting in an OKR system can include setting goals that encourage cooperation, teamwork, and building connections among employees.
• Need for (self)esteem and recognition: This level of needs refers to the need for recognition, respect, and achieving personal accomplishments in the workplace. Cascading goal setting in an OKR system can include setting goals that enable employees to achieve their goals, feel recognized, and achieve personal progress.
• Need for self-actualization: This highest level of needs refers to the need to realize one's potential, personal growth, and achieve peak performance. Cascading goal setting in an OKR system can include setting goals that encourage employees to develop their skills, achieve excellence in their work, and realize their full potential.

Where are the biggest mistakes made?

• Setting unclear or unattainable goals: One of the most common problems is a lack of clarity in goal setting. Goals should be precisely defined, measurable, and realistic. If goals are too vague or unattainable, it can lead to frustration and a lack of motivation.
• Lack of connection to the company's vision: Goals in an appraisal system should be aligned with the company's vision and strategy. A lack of connection to higher company goals can lead to less engagement and a sense of lack of purpose among employees.
• Focusing only on short-term results: Some people make the mistake of focusing too much only on short-term results and neglecting long-term goals. This can lead to short-term improvements, but in the long run, it can limit the company's growth and development.
• Insufficient progress tracking: Tracking progress is crucial for a successful appraisal system. Insufficient tracking or lack of feedback can make it difficult to understand where results have been achieved and what needs improvement.
• Inappropriate allocation of rewards and recognition: Fair allocation of rewards and recognition is key to maintaining employee motivation and satisfaction. Insufficient fairness or inconsistency in rewarding can lead to dissatisfaction and a lack of motivation.

To avoid these mistakes, it is important to have a clear and transparent appraisal system, ensure clarity in goal setting, provide timely feedback, connect goals to the company's vision, and fairly and consistently reward achievements.

A behavioral scientist's perspective and potential problems

Performance appraisal systems (OKR and KPI) can have several problems and challenges.

• Over-reliance on external motivation: The behaviorist perspective emphasizes the importance of external incentives for motivation, such as rewards and recognition. However, an appraisal system that relies too heavily on external motivation can lead to problems because employees may become dependent on external rewards instead of developing intrinsic motivation and satisfaction.
• Risk of distorted behavior: A performance appraisal system focused solely on achieving goals can lead to distorted behavior. Employees may focus only on those aspects of the job directly related to the set goals, neglecting other important aspects of work. This can lead to less creativity, collaboration, and innovation.
• Competition instead of collaboration: If the appraisal system is too heavily based on comparing and ranking employees, it can create an atmosphere of competition instead of collaboration. Instead of fostering teamwork and knowledge sharing, employees may compete against each other to achieve better results. This can negatively affect the work culture and atmosphere in the company.
• Lack of context and flexibility: An appraisal system that is too rigidly structured and does not adapt to changes can have limited value. Each situation may have specific circumstances that need to be considered. A lack of context and flexibility in evaluation can lead to unfair valuations or disproportionate focus on certain aspects of work.
• Lack of continuous feedback: The behaviorist approach emphasizes the importance of continuous feedback to support employee learning and development. If the appraisal system does not provide regular and constructive feedback, employees may have difficulty understanding their strengths and areas for improvement.

The behavioral perspective highlights the importance of a balanced approach to the appraisal system, which includes providing internal motivators, supporting teamwork, adapting to context, continuous feedback, and employee development. This perspective can help avoid potential problems and ensure that the appraisal system is effective and encouraging for all employees.

OKR and Industrial-Organizational Psychologists

Implementing an OKR system can be a complex process that affects people in a company in various ways. In this context, I-O psychologists can make a significant contribution by providing expert advice and support.

• Education: Psychologists can provide education to employees about the OKR concept, its purpose, benefits, and how to apply it. This will help in understanding OKRs and creating a common language within the company.

• Culture change: Introducing OKRs often requires a change in culture and mindset within the company. Psychologists can help identify obstacles and resistance and develop strategies to overcome these challenges. They can provide support in promoting a positive work climate, collaboration, and open communication.
• Employee involvement: Psychologists can participate in the process of involving employees in goal setting and identifying key results. Through workshops, individual consultations, or workshops, they can support employees in setting goals that are related to their interests, motivations, and personal development.
• Performance tracking and feedback: Psychologists can provide guidelines for performance tracking, giving feedback, and evaluating achievements within the OKR system. They can help develop structured and objective methods for tracking progress and provide constructive feedback that will encourage employee growth and development.
• Motivation management: Psychologists can provide insight into motivational factors and theories that can be applied in the context of OKRs. They can help identify key motivators, set challenging goals, and foster intrinsic motivation among employees.

They can also provide expert knowledge and understanding of human behavior, motivation, and interaction, which is crucial for successful OKR implementation and achieving positive results. Their support can contribute to better adaptation, participation, and adoption of the OKR system within the company.

Conclusion

OKR (Objectives and Key Results) and KPI (Key Performance Indicators) are two popular frameworks for goal setting and tracking in organizations. OKR focuses on setting ambitious Objectives and defining measurable Key Results that will lead to the achievement of those objectives. On the other hand, KPIs are metrics used to track success in achieving specific goals.

Goal setting in an OKR system requires clearly defining measurable and achievable goals that are aligned with the organization's vision and strategy. KPIs provide objective data on performance and success and are often used for decisions about rewards, promotions, or resource reallocation.

There is a strong connection between KPIs and OKRs in a performance appraisal system, as Key Results in an OKR system are often defined based on relevant KPIs. The combination of OKRs and KPIs enables organizations to set clear goals, define success metrics, and track progress toward achieving those goals.

OKR as an evaluation method originates from the technology industry but has become popular in other industries due to its simplicity, focus on results, and agility in adapting to changes. Recently, OKR has become more popular compared to KPIs due to its ability to set clear goals and provide context for achieving those goals.

With OKRs, organizations can set ambitious goals, define success metrics, and track progress toward those goals. The combination of OKRs and KPIs provides comprehensive performance monitoring and achievement of organizational goals. Ultimately, OKR provides a framework for employee motivation, alignment with company vision, and achieving success based on defined goals.

Disclaimer

OKRs can be useful for most organizations, but there are situations where they may not be the most appropriate or effective. In cases where they might not be the best fit, implementation should be approached with some caution.

• Small organizations with simple structures (under 30-ish people): In very small organizations with a small number of employees and simple structures, an OKR system can be too extensive and overly complicated. In such situations, simpler methods of goal setting and results tracking may be more effective.
• Organizations with very short-term goals: If an organization primarily has short-term goals that change rapidly, it may be better to use agile methods or tools that allow for quick adaptability and priority changes.
• Industries with very strict regulations: In some industries, such as pharmaceuticals or finance, there is a need for detailed management and strict regulatory requirements. In such environments, more traditional methods of goal setting and performance tracking may be better.
• Organizations with a low degree of maturity and cooperation: The OKR system requires a high degree of cooperation, open communication, and a shared understanding of goals. If an organization has a low degree of maturity in these areas, implementing OKR can be challenging.