7 min readKPIs and Performance Management
KPI in simple terms: what it is and how to link KPIs to pay
A KPI is a handful of numbers that show whether a person delivered what the business pays them for. I explain in plain words where indicators come from and how to link them to pay, with a worked example.
The word KPI comes up in almost every company today. But when I ask managers what exactly counts as a KPI in their company and how it affects pay, the answers often differ even within one team. Let me explain it in simple terms.
What a KPI is in simple terms
KPI stands for Key Performance Indicator. Put simply, it is a number that shows whether a person or a department delivered what the business pays them for.
The important word is "key". A company can track hundreds of metrics, but KPIs are only the 3–5 that truly reflect a specific role's contribution to the result. For example:
- for a sales representative — sales plan completion and the number of active outlets;
- for a warehouse manager — accuracy and timeliness of shipments;
- for a call centre operator — the number of requests handled and call quality;
- for a recruiter — time to fill vacancies and the share of new hires who pass probation.
If an indicator cannot be measured, or the employee has no influence on it, it is not a KPI but a wish.
A KPI is not a list of duties
The most common mistake is to rewrite the job description as a table and call it KPIs. "Submit reports on time", "observe work discipline", "be polite to customers" are duties. The base salary pays for them.
A KPI answers a different question: what result did the business get from the person doing their job?
Where KPIs come from: from company goals to the role
Good indicators are not invented for each position separately. They are cascaded top-down:
- Company goals. For example: grow revenue, keep margins, open new outlets.
- Department goals. What each department must deliver for the company to reach its goal: sales — revenue, warehouse — error-free shipping, HR — staffing and retention.
- Role indicators. What exactly each person in the department influences.
This is called a goal tree. Its main advantage is that KPIs of different departments stop contradicting each other. When KPIs are invented separately, it is easy to end up with sales rewarded for shipping at any cost and finance rewarded for not shipping to customers in debt — each department honestly hits its plan while the company loses money.
How to link KPIs to pay
Linking KPIs to pay means splitting an employee's income into two parts:
- Fixed part (base salary) — pay for doing the role: the person shows up, works and performs their duties.
- Variable part (KPI bonus) — pay for results: depends on how well the indicators are met.
Then four decisions are needed.
1. What share of income goes into the variable part. The more a person influences the result, the larger it is. For salespeople and sales reps the variable part can be significant; for an accountant or a back-office specialist it is small. A large variable part where a person barely influences the number creates a sense of unfairness, not motivation.
2. Indicator weights. With three KPIs you need to agree which matters most. For example: 50% sales plan, 30% receivables, 20% active outlets.
3. Achievement scale. Decide in advance what happens at 70%, 90% and 110% achievement. Usually there is a threshold (below it no bonus is paid for the indicator), a target (100%) and a cap (above it the bonus no longer grows).
4. Where it is written down. Bonus rules must be set out in a company policy and clear to the employee before the period starts, not announced afterwards.
KPI bonus calculation example
Take a hypothetical sales representative. Base salary is UZS 6,000,000; the target bonus at 100% on all KPIs is UZS 2,000,000.
| Indicator | Weight | Achievement | Scale coefficient |
|---|---|---|---|
| Sales plan | 50% | 105% | 1.05 |
| Receivables collected on time | 30% | 90% | 0.90 |
| Active outlets | 20% | 70% | 0 (below the 80% threshold) |
Scale: below 80% — coefficient 0; from 80% to 120% — equal to the achievement percentage; above 120% — no further growth.
Bonus = 2,000,000 × (0.5 × 1.05 + 0.3 × 0.90 + 0.2 × 0) = 2,000,000 × 0.795 = UZS 1,590,000.
Total for the month: 6,000,000 + 1,590,000 = UZS 7,590,000.
The employee sees where they fell short and what it cost. The manager sees what to build next month's conversation around.
Common mistakes when introducing KPIs
- Too many indicators. With ten of them, each weighs 10% and none decides anything.
- An indicator the person cannot influence. For example, a storekeeper's bonus tied to company revenue.
- No data. If an indicator is calculated by hand and disputed every month, the system quickly loses trust.
- KPIs that contradict each other in neighbouring departments.
- Rules changed retroactively or every month.
- Paying for attendance disguised as KPIs. If everyone always gets the bonus, it is part of the salary, not a KPI.
- Nobody talks to the employee about results. KPIs only work together with regular feedback — I wrote about this in the article on performance review.
From practice
In one retail chain with 38 branches, payroll was growing faster than efficiency. The reason was that pay was not linked to results, and the structure and roles needed rethinking. We rebuilt the organisational structure, created a KPI model and a new pay system, moved HR processes into Bitrix24 and 1C and introduced regular HR analytics. Payroll fell by 30% while operational efficiency was maintained, and staff turnover fell by 20%.
In another project — also retail, with stores, an office and a warehouse — pay was tied to attendance rather than results. After moving to cascaded KPIs and a grade system for cashiers and baristas, payroll became manageable, and after relaunching motivation we were able to fully staff frontline positions.
In a contact centre, introducing KPIs together with a review of functions and headcount meant the operator plan was met at 110% every month and headcount was cut by 20% without loss of quality.
In all three cases KPIs worked not by themselves, but because we first sorted out who was responsible for which result.
Frequently asked questions
How many KPIs should one employee have?
Usually 3–5. Fewer than three makes it easy to skew work in one direction; more than five and the indicators blur and stop steering behaviour.
What share of pay should depend on KPIs?
It depends on how much the person influences the result. Sales roles have a larger variable part, support roles a smaller one. There is no universal figure: it is chosen for the role and the labour market so that the base salary stays competitive.
Do office and back-office staff need KPIs?
Yes, but different ones: deadlines, accuracy, quality, compliance with standards. And with a small variable part — their contribution to revenue is indirect.
How are KPIs different from OKRs?
KPIs measure a role's regular result and are usually linked to pay. OKRs are a way to set ambitious quarterly goals; they are more often not tied to bonuses so that people do not lower the bar.
How often should KPIs be reviewed?
Indicators and weights — once a year or when the strategy changes. Plans (target values) — per period: month or quarter. Rules must not change within a period.
Where to start if the company has no KPIs?
With company goals and the organisational structure: who is responsible for which result. Then 2–3 key roles where the link to results is most direct (usually sales), a one-quarter pilot, and only then the other departments.
If you want to build KPIs from business goals down to specific roles and link them to pay, see how I work on KPIs and performance management.