the difference between OKRs vs KPIs and remuneration
OKRs vs KPIs, the difference and why it matters for strategy execution and HR
what is a KPI?
KPI is an abbreviation for Key Performance Indicator.
KPIs measure the performance of an element or an activity over time.
KPIs are usually tracked over several months or years.
Here are some common examples of KPIs:
- Website visitors
- Sales conversion
- Employee satisfaction
- Employee turnover
- Customer net promoter score
- Current asset ratio
- Debt to equity ratio
KPIs are often reported on a balanced scorecard, to ensure the organization is taking a balanced approach to measuring performance:
what is an OKR?
OKR is an abbreviation for objectives and key results.
The OKR methodology was created by Intel’s founder, Andy Grove, and since brought to fame by John Doerr and the founders of Google.
OKRs are brilliant for strategy execution.
Objectives clearly state what you want to achieve. They are aspirational and qualitative.
Key Results measure outcomes. They are tangible and quantitative.
OKRs usually have a lifetime of one quarter, with weekly check-ins on progress during the quarter. Early-stage companies may choose to run OKRs monthly.
OKRs vs KPIs - what is the difference?
Let’s take an example.
You might have a KPI that measures revenue-per-month. Let’s say your revenue is currently $10m/month.
In a strategic planning session, you set a one-year goal to double revenue to $20m/month.
Goal setting is easy. Execution is where the going gets tough and value is created.
With your $20m/month strategic goal in mind, you can now set your objectives for the next quarter. This may take some research, brainstorming and workshops. Let’s say at the conclusion of these planning activities, you agree on one objective to rally behind for the next quarter, to:
solve how to make our baby pram products smart-prams that Australian parents will love
Key results measure the outcome of your objective.
Key results provide clarity on how you will evaluate whether or not the objective has been achieved. Google is famous for making their post-quarter reviews of OKRs binary, asking themselves:
“Did we achieve the objective, yes or no?”
In this example, let’s say you set the following key results for the objective:
- 200,000 downloads of our design brochure to unique IP addresses in Australia
- 50,000 Australian based parents sign up to receive our pre-launch offer
Now your team will have a clear focus and common understanding of expectations for the next quarter.
lifespan and impact of OKRs vs KPIs
Whilst your KPIs may run for several months or years, OKRs drive strategy execution for the current quarter - aligning the energy, creativity, intellect and hard work of everyone in your organization.
Strategy execution through OKRs may impact several KPIs of the organization, for example:
- Revenue per Month - moving towards our strategic goal to double revenue to $20m/month within one year
- Number of Pre-Orders
- Employee Satisfaction
- Brand Awareness
This is why it is acceptable to have manual updating of actuals for OKRs. OKRs usually have a lifetime of one quarter, so automation is less important. In fact, many OKR thought leaders and consultants say that having OKR owners update the progress and actuals on their OKRs each week, is a discipline that positively impacts performance.
Whilst most organizations will only set 1 to 5 OKRs for a quarter (which you can read about here), there are likely to be a hundred or more KPIs that get tracked for several months or years. For this reason we are now seeing some brilliant innovations in BI tools that can pull live KPI data from several different systems, into custom reports with configurable alerts.
OKRs vs KPIs - why does it matter?
One great advantage of the OKR methodology is that it fuels creativity, risk taking, rapid learning and ambition.
Most practitioners, including the father of OKRs, Intel’s Andy Grove, and the pioneers since, firmly believe that remuneration should be decoupled from OKRs. At #stratapp, we share the same view. You want people to take risks and to strive for objectives that are ambitious and motivating. That’s how you transform organizations, create new markets and innovate beyond what competitors believe is possible.
decoupling OKRs from remuneration
You don’t want OKRs to get caught up in the typical scenario that happens with KPIs. For example, the:
- CEO and Sales Director meet to agree sales targets and a bonus plan for next year
- Sales Director thinks they can do $50-60m revenue, so he opens by suggesting a target of $30m
- CEO proposes a 2.5% bonus on revenue for the Sales Director, on sales achieved above $30m
- Sales Director negotiates that threshold down to $20m, and wrangles in an extra bonus of another 2.5% if the sales exceed $40m (a target 33% below what he is privately aiming for)
That gets documented and the game continues, year on year.
As you can imagine, you don’t want that age-old human dynamic taking place every quarter on OKRs.
You want people to dream, be creative and really strive to take the organization to new levels.
Even if you don’t hit every key result, the collective impact of rallying everyone behind quarterly OKRs will move the organization forward on strategy execution like never before.
learning from Vivino on reviewing OKRs
For this reason, in designing the OKR module for #stratapp, we have applied a learning from the founder of Vivino (short video here). That is, in #stratapp, when you review your OKRs during and at the end of the OKR period, you can assign a simple ‘smiley face’ outcome for the review:
- not happy
This is where the team leaders and executives get to apply some judgement, alongside the Google-style binary assessment of whether or not the OKR was achieved.
For example, even if we are behind on several key results sitting below an objective, we may be very happy with where we have landed overall in relation to that objective.
This functionality, and how you apply it, is a key ingredient to building culture and making sure your objectives are ambitious and motivating each quarter. In #stratapp, we recommend making these ‘smiley face’ reviews part of your weekly and monthly check-ins with the OKR owners and their teams.