I like the sound of the Objectives and Key Results system that Google uses:

First, you set up an Objective. Then you set up a number of "Key Results" that are quantifiable that will help you hit your objective.

Your objectives should be definitive and measurable. Don't say, for instance, I want to make my website prettier. Say you want to make your website 30% faster. Or you want to increase engagement by 15%.

This is great, but only if every single person in the company does it. If you limit OKR to certain people, for example engineers, then you create a two-class system: people whose performance is graded, and people who aren't. Everyone up to and including (and in some ways especially) the CEO needs to be a part of the system.

On a Google Ventures post about the system, Rick Klau clarifies:

Low grades shouldn’t be punished [...] OKRs are not synonymous with employee evaluations. OKRs are about the company’s goals and how each employee contributes to those goals. Performance evaluations - which are entirely about evaluating how an employee performed in a given period - should be independent from their OKRs.

Makes sense, right? It encourages employees to set ambitious objectives, and ranks the company as a whole on how its constituent members hit their targets. I think the transparency - everyone can see everyone else's OKRs - is an important facet of that.

Have you used them? How did they work out for you?