A version of this article appeared in the third quarter 2023 issue of World at Work’s “Workspan Magazine.”
Objectives and key results (OKR) have become the latest management tool to gain popularity. OKRs are designed to align everyone in an organization to a small number of critical corporate objectives. Their origin can be traced back to technology companies, but their use has since spread to organizations in many other industries.
We have seen companies putting in OKRs to replace MBOs—or management by objectives, but is this a like-for-like substitution or the beginning of a new trend? And should companies begin thinking about adding OKRs to their performance management process and possibly even their compensation program?
To answer these questions, let’s first define the terms and identify their differences and similarities. MBOs were created in the 1950s and designed to align everyone in the organization with company objectives. Management thought-leader Peter Drucker was the first to coin the term in his 1954 book, “The Practice of Management.” MBOs gained momentum in the 1960s when Hewlett-Packard famously adopted them.
Like MBOs, OKRs also are designed to align everyone in the organization with company objectives. Their creation is credited to Andy Grove at Intel, and they were later popularized by John Doerr, who worked with Grove at Intel. Doerr later helped put OKRs in place at Google, where their popularity exploded.
It seems that the overall objective of MBOs and OKRs is the same—aligning individuals with corporate objectives. So how are they different, and why do we need a new framework to think about individual performance objectives? These are the four primary differences between MBOs and OKRs:
- Timeframe. MBOs tend to be set annually, as they were designed to be incorporated into the timeline of the annual planning process. In contrast, OKRs are meant to be created or adjusted quarterly, or more frequently, to keep pace with the business.
- Visibility. Everyone in the organization can see everyone’s OKRs. This visibility creates peer pressure and increases the likelihood that all employees will challenge themselves to reach identified goals.
MBOs, on the other hand, are mostly private. Few people in the organization will see someone else’s individual MBOs. Typically, MBOs are visible only to the individual, their manager and perhaps one or two other leaders to drive consistency.
- Goal setting. One of the core tenets of OKRs is that individuals or teams use a bottom-up approach to set goals for themselves. They are given the organization’s objectives to help set their individual goals in support of overall objectives. Individuals and teams are encouraged to make the goals aspirational with assurance that their performance against these goals will not count against them in either their compensation or their career path. OKR goals must be quantitative. Performance against OKRs and their link to the overall objective make them too important to leave to subjectivity. OKRs are designed in a way that makes 100% achievement a stretch. The challenging nature of the objectives tends to make the performance distribution wider than with MBOs.
MBOs, on the other hand, tend to come from the top down. MBOs start with the corporate leader, cascade through the management layer and eventually end up with individual contributors. MBO goals can be qualitative or quantitative and often leave some “wiggle room” in their evaluation. Most employees achieve their goals, with only a handful falling short.
- Ties to compensation. MBOs are usually tied to compensation in some way, whether in the base salary bonus or both. When companies include MBOs in their incentive plan, an individual’s performance on MBOs is directly tied to their incentive payout and may also be tied to their base salary merit increase.
OKRs, on the other hand, are designed to be disconnected from bonuses. Because they are set by individuals or teams, tying them to compensation would inevitably cause people or groups to sandbag their goals so that they could achieve them and get the full incentive payout.
Unfortunately, we have seen companies simply change the acronym from “MBO” to “OKR” and then treat them the same. If your MBO system was not working well before, a simple rebranding with no attention paid to the underlying process will have no appreciable effect.
Here is a quick summary of how MBOs and OKRs differ:
Below is an example of how a single corporate objective may be translated to the sales organization and ultimately down to salespeople:
Fully divorcing bonuses from OKR performance is preferable because it allows individuals and teams to set challenging stretch goals that move the business forward. However, given that multiple companies are including OKRs in their incentive plan, even if the OKRs are simply MBOs in disguise, it’s important to lay out recommended ground rules:
- Pay on actual output, not achievement of the goal, to drive aggressive goal setting. If Person 1 sets a goal of one new account in a quarter and achieves two and Person 2 sets a goal of four new accounts in a quarter and achieves three, then the organization would pay Person 2 more than Person 1 based on output rather than on percentage of goal achievement.
- Keep the goals quantitative. The outcome should be clear to everyone regardless of whether it’s achieved. Manager discretion should have no impact.
- Shorten the plan period. An annual plan period is too long for OKRs. People tend to set goals and forget them. Quarterly plan periods allow you to have real impact.
- Make goals challenging. The performance distribution is likely to be wide because achievement of goals isn’t a given. Allow individual input into the quotas and use a bottom-up approach rather than a top-down approach.
Proponents purport that OKRs are the new MBOs. It’s true that OKRs are a useful management tool that already have proved effective across many tech companies. However, organizations attempting to simply replace MBOs with OKRs, without changing the underlying process and philosophy, may be setting themselves up for failure. Replacing an acronym changes nothing. Before you simply jump to OKRs, answer the following questions:
- How good are we at setting objectives?
- Are individuals and managers willing to set challenging objectives?
- Are we willing to differentiate payouts based on performance?
- Are the objectives driving behavior?
- Have we eliminated subjectivity in evaluating performance?
The answers to these questions will determine how successful you are in driving corporate objectives down to individuals in the organization, regardless of whether you call them MBOs.