Performance management: why linking goals directly to bonus is doomed to fail
The way we incentivise employees is stuck in the last century. In today's fast-moving business environment, an annual performance review with goals linked to objectives is not only outdated – it could be actively damaging your business.
I used to work for a company where part of my pay was linked directly to a set of annual objectives. An annual bonus was allocated to staff (particularly non-sales related employees) based on whether or not three objectives had been completed. If all three annual objectives were achieved, payment of the company bonus would be made. If there was failure on any objective, my share of the company bonus would be forfeit.
Imagine objectives set in July 2019, being looked at in April 2020 – they'd most likely be completely irrelevant with four more months to go still before the new objectives would be set.
The setup of the objectives was carried out via discussions between the employee and manager using the well-known SMART objective writing concept. The theory was that every July, my manager and I would discuss the requirements that we should be focusing on over the year ahead, and together we would put in place three objectives that were useful and link them to one of four business priorities that had been outlined. These had to be specific, measurable, attainable, realistic and time-bound objectives that could clearly be signed off when completed and were linked back to the main business priorities.
On the surface, it’s easy to see why this process was set up, and what the executive team was trying to achieve – by giving me a set of goals to reach, it was hoped that I would be incentivised to perform well and that I would feel effectively rewarded when my performance was at the level that the business wanted it to be. It's clear-cut, simple and easy to understand.
It didn’t work, however – not for me, my team, nor many of the colleagues I spoke to.
The problem with objectives and 'sandbagging'
The reasons for this were very simple. When setting the objectives, the employee and the manager would both be ‘sandbagging’ to make sure that the objectives could easily be achieved. The employee, focusing on the bonus outcome will negotiate to make sure the attainment of the objective will be as easy as possible for them, to avoid any risk of losing the bonus. The manager, wary of having a team that shows up on reports as underperforming, is unintentionally complicit in this process and will angle the objectives so that they appear to any executive checks to be challenging, but so that the manager knows that the team will be successful.
Setting a hard objective and failing is far better performance than setting an easily reached one.
In addition to this, the annual nature of the objectives made them nonsensical. With the three objective compensation model, employees and managers would naturally write objectives that would run for the whole year (which would make the time-bound element effectively redundant). These three objectives would be set, but usually by the time the year was completed, and the objective progress was checked, they were no longer relevant, and would just be signed off ‘to make sure you get your bonus’. Imagine objectives set in July 2019, being looked at in April 2020 – they'd most likely be completely irrelevant with four more months to go still before the new objectives would be set.
Sandbag, or stretch?
The final part was the usual issues that occur with any standard ‘manage by cascaded objectives’ model. My team would not really understand how what they were working on was impacting the business goals, as there was no clear alignment other than tagging that they were part of one of the four that had been highlighted. Two employees in the business could be working on identical objectives, with no concept that they were replicating each other’s work, or worse, both moving in opposite directions, pushing the business in contradictory ways. The team would set and measure the objectives in a siloed fashion. There was no clarity on what other teams in my area were doing, let alone what other parts of the business were focusing on. An objective of mine ‘achieve result A’ could be completely at odds with the needs or targets of that other team’s ‘achieve result B’.
Do I think that my company was alone in using this sort of process? Research by Bersin and Deloitte highlight that this is not the case, indicating that ‘performance management is the most universally hated people process in businesses'.
That’s why when I was shown the methodology of ‘objectives and key results’ (OKRs) I began to understand that there was a much better way of helping organisations to perform and to make sure that employees actually engage with the performance process and their impact within the business.
As well as resolving the issues around the failures of cascade, an important concept of the OKR model is the ‘right to fail’. Setting a hard objective and failing is far better performance than setting an easily reached one. Putting it as simply as possible – would you prefer an employee who set an objective of obtaining ten new clients and brought in seven, or an employee who set an objective of three new clients and brought in three? In my previous company’s objective model the first employee would be rewarded, and the second would not – It’s no wonder everyone would choose to set and probably restrict themselves to only look to achieve the target of three.
Ask yourself the important question – do you want your employees to sandbag or to stretch? Isn’t it time you changed your traditional objectives model to be something that means the business moves forward rather than stagnates?
Interested in this topic? Read High performance: driven by passion, not perks.
Bruce is an expert in HR Software, with a particular focus on Performance Management, Talent and Agile Execution of Business goals. He is an advocate of the OKR Methodology and aims to help businesses understand how they can better help their employees to adjust to the changing world we all exist in. He believes in the power of Software to...