Designing and implementing a fair and equitable compensation strategy comes with many considerations — like how to set salary bands, what market benchmarking data to use, or if employees will be offered stock options. Since a strong compensation package is key to employee retention and attracting top talent — not to mention supporting gender and racial equality in the workplace — Human Resources departments must put a great deal of thought and care into setting compensation strategy.
Of the many consequential decisions HR professionals and compensation specialists have to make, whether or not to link goal achievement and compensation is a top concern. Below, we’ll examine when it makes sense to do so — and when it doesn’t — as well as provide tips for motivating employees without joining the two.
When Aligning Goal Achievement With Compensation Makes Sense
Companies that choose to link goals or objectives and key results (OKRs) with pay do so because this compensation strategy supports their company values or priorities, which may favor outcomes and results above all else. Here are three reasons it can make sense to tie goals and pay for some organizations.
1. It underscores the importance of meeting goals for organizational success.
Companies set goals or OKRs at the organizational, team, and individual levels as a way to map and execute strategy to advance the business’s success. By factoring goal or OKR achievement into an employee’s compensation plan, the company sends a clear message: It’s crucially important for individuals and teams to hit their goals, so the organization can reach theirs.
2. It can help employees feel more connected to the company and increase a sense of belonging.
Linking performance to compensation packages can help align individual, team, and company goals so employees feel connected, said Catherine Gillespie-Vargas, Manager at diversity, equity, inclusion, and belonging (DEIB) consulting firm Peoplism. “Two aspects of belonging are connection to the organization’s goals and [making a] contribution to meaningful outcomes,” she said. “To connect employee efforts to meaningful impact on an orgnzations’ goals can increase belonging.”
3. It creates a more complete picture of performance.
Many companies prefer to make pay decisions and build compensation strategy on factors like market value for a role, rather than on employee performance. But if an organization does tie performance to pay, then failing to include goal or OKR achievement in compensation decisions leaves out a significant component of performance. When performance is attached to pay, factoring in goals and OKRs leads to a more complete portrait of performance.
The Downsides of Linking Goals and Compensation
While there may be some benefits to tying pay to goals, there are a number of unfavorable consequences that must be considered. Here are six challenges linking pay and goals presents.
1. Performance consists of more than just goal achievement.
Performance is the collection of behaviors and outcomes of an employee and the impact that person has on an organization. It’s how an employee’s willingness to support colleagues and their creative approach to team-building contributes to the company’s positive organizational culture. Performance also reflects an individual’s eagerness to learn new skills, seek out challenges, and admit mistakes, and how they embody and advance the growth mindset of the company. With too narrow a focus on measuring goals and OKRs, organizations ignore other factors of performance — like alignment with competencies or company values — which are essential to creating a positive company culture.
2. Goal-setting and measurement can be highly subjective.
Goals are set and measured by humans, which means there’s going to be subjectivity and human error. “...Oftentimes ratings are not accurate [and] subject to bias, and achievement of the chosen goals is not actually under employee control,” Gillespie-Vargas noted.
Additionally, if goals are not calibrated regularly, goal difficulty across teams may not be consistent, which creates an unfair system by which to judge performance and make compensation decisions. “[Linking goals and compensation] introduces an area that’s rife for subjectivity and therefore bias,” cautioned Amy Spurling, founder and CEO of Compt, an employee perks and rewards company. “It’s too hard to make goal-setting and measuring consistent and accurate across teams or the organization.”
3. Goals are often “sandbagged.”
Rather than being an incentive for employees, tying employee compensation to goals can instead create undesirable circumstances, like “sandbagging” — the strategy where goals are purposely set low so employees can easily meet them. What’s more, said Gillespie-Vargas, research suggests that linking goals and compensation doesn’t motivate performance, but rather is more likely to lead to this strategy of lowballing expectations. “It’s more likely to encourage misrepresentation of performance or strategic behaviors, rather than reward good performance,” she cautioned.
When organizations, teams, and individuals are aiming high, failed goals can still represent significant advancement. But if the primary concern becomes hitting goals at all costs rather than seeing what an individual or team might be able to achieve, companies lose an opportunity to reap the benefits of ambitious goals.
4. It can demotivate employees.
Linking goals to compensation doesn’t necessarily incentivize employees to hit their goals, and can actually do the opposite. To feel motivated, said Gillespie-Vargas, employees must be able to see how their efforts influence the progress toward a goal. They also have to believe that the effort needed to satisfy the goal is reasonable. “Employees are estimating how much of their efforts influence the outcome and what they will get out of it,” she said.
When one of these factors is disproportionate to the other — like if employees don’t think their efforts have enough influence on the outcome, or if what the employee gets from achieving the goal is not sufficient for the energy they have to expend — then linking goals and compensation can demotivate employees, said Gillespie-Vargas.
5. It can negatively affect culture.
Psychological safety has been proven again and again to be a shared characteristic across high-performing teams and organizations. Yet linking goal achievement to compensation can encourage an individualistic culture which degrades psychological safety, as employees will tend to prioritize their individual goals and interests above collaboration or innovation.
Linking pay and goals can also create a scarcity mindset among the workforce regarding compensation. Employees may believe salary comes from a single, fixed budget, which can create the fear that if others receive more, there will be less for them, Gillespie-Vargas pointed out. “This results in unproductive internal competition and discourages teamwork, and thus, innovation,” she said.
6. Goals and OKRs can change.
Employees may not always hit their goals or OKRs, and that’s not necessarily a bad thing. Businesses must shift to respond to how the market changes, and goals or OKRs are often not adjusted to reflect this.
“If someone missed their OKRs, maybe it’s because [the company] had to change course or reprioritize,” said Spurling. “Tying someone’s compensation to goals or performance or on a set of metrics that aren’t the ultimate harbinger of whether or not they did a good job is problematic.”
3 Tips for Linking Goals and Pay
If you do decide to tie pay to goal achievement at your organization, keep these three considerations in mind.
1. Use bonuses wisely.
Of all the types of compensation organizations can use as an incentive to hit goals, bonuses are the most common. One-time bonuses can be an effective way to reward employees or teams for meeting ambitious goals, as long as organizations have objective, consistent, and well-communicated metrics for setting and measuring goals. Unconscious bias, for instance, can lead managers to apply inconsistent standards across employees. Rather, companies must be certain that the goals that are being evaluated were fairly set and calibrated across the organization.
Another way to award bonuses is based on whether or not the company hits its top level goals or OKRs. “It’s more fair when you tie bonuses to the entire company’s performance rather than individual performance,” said Spurling. “So if the company achieves X, you get Y.”
Yet Spurling noted that this can still create inequalities because some people will invariably contribute more to achieving company goals than others. “It can still be inherently unfair because some individuals may not have had much of a role in hitting that goal,” she said. But at least, she noted, it creates more of a team dynamic than an individualistic, competitive one.
2. Clearly articulate your intention.
To effectively link goal achievement with compensation, “companies should narrowly define their intended goals in the process,” said Gillespie-Vargas. For example, she continued, this could be things like rewarding high performers, or tying individual efforts to company goals.
It’s also necessary for businesses to be clear about what is within an employee’s control and what is not, and only factor the former into compensation decisions. For instance, team goals that are not achieved because of shifting market needs should not be considered as part of pay decisions.
3. Only do it for select roles.
Some positions are better suited for linking goal achievement and compensation than others. Revenue-generating positions, like sales, are the classic example — but may not actually be a great fit for this pay structure.
“Sales is the ‘last mile’ and relies on every other function to do their job well. Product has to deliver the right scope to engineering, engineering has to build the right thing, and marketing has to get them the leads,” said Spurling, noting that much of this is out of a salesperson’s control. “[A salesperson] could miss their numbers because of something that has nothing to do with their individual performance and that, to me, is fundamentally unfair,” she said.
Gillespie-Vargas said there are two important elements to watch for when selecting the right roles for linking goals and pay: “Tying OKRs to compensation can be motivating and effective when effort ties directly to quality, and the measurement is clear and discrete,” she said, pointing out that this could be true for some engineering roles. “What we find however, in modern knowledge work, is that few roles have clear metrics which are so straightforward and fully within an individual’s locus of control as to make sense [for linking goals and pay],” she added.
How to Incentivize Employees Without Linking Goals and Compensation
If you decide a compensation program that ties goals with pay isn’t right for your organization, there are other ways to motivate your employees, like emphasizing their contribution to company culture and paying fair market value for their role.
In performance reviews, you can evaluate employees on things like their contributions to company culture or their embodiment of core values, and be specific. “Managers should provide examples of how someone did (or did not) exemplify the core values of the company,” advised Danielle Callendar, Director of Process Change at Peoplism. “Doing so sets the expectation that the company’s values matter enough to be directly evaluated, and that contributing to the company’s culture is just as important as achieving goals.”
At Compt, CEO Spurling said paying employees market value for their role motivates employees and boosts employee engagement. “We pay everyone the salary that it would cost for us to go out and hire a new person to do the same role,” said Spurling. That way, employees can focus on building great products and providing excellent service for their customers without trying to seek better pay elsewhere or wondering if they’re paid fairly as compared to colleagues, she added.
Another strategy is to use what’s known as “prosocial bonuses,” a bonus that employees can give to others rather than spend on themselves. “Early research suggests public-service motivation means prosocial bonuses may produce measurable benefits for both employees’ personal needs and company performance,” said Gillespie-Vargas. Despite the lack of long-term research, it also seems likely that prosocial bonuses would positively contribute to company and team cultures, much like peer-to-peer recognition does.
Every company has its own compensation strategy beliefs and labor market considerations, and there’s no one right or wrong answer to pairing goals and compensation. Yet doing so does create the additional need for guardrails against bias and ambiguity, in the form of standardized processes and calibrations.
For the organizations that choose not to join the two, recognizing an employee’s contribution to company culture and paying fair market wages are among the most effective ways to motivate teams and boost employee engagement.
“There is no one perfect way to set compensation strategy, or else we’d all have adopted it already,” Spurling said. “It depends a lot on company stage and size and the priorities of each business.”
As you decide what works best for your organizational needs, refer to the strategies outlined here for empirically-based research and expert insight. For more comprehensive information on compensation, download Lattice’s eBook HR’s Guide to Setting a Compensation Strategy to help you design your own.