How high to set goals is a debate that’s raged for years. Some say to set the targets so that all of them can reasonably be attained. Others advocate setting aggressive stretch goals with the expectation that not all of them will be met but more progress will be made than if the goals had been set lower.
Be very careful about setting stretch goals if your staff’s compensation or individual performance reviews are based on hitting those goals. People are driven to achieve goals. When goals can’t be achieved within the rules, people are strongly tempted to violate rules.
Look at Wells Fargo, who set high targets for cross-selling products to customers. The drive to achieve caused Wells Fargo employees to create millions of fake accounts. Wells Fargo was fined $185 million and faced billions of losses in lawsuits.
The obvious solutions include creating a culture of honesty and a strong internal control system. A less obvious solution involved insights from behavioral finance. People perceive losses much differently than gains. The pain of loss is twice as strong as the pleasure of similar gains. When people see themselves as “losing”, they take big risks, including cheating, to not lose.
A compromise solution to setting goals is to set stretch goals but set the bulk of performance compensation at a level that’s achievable. This limits the feeling of loss. Allow further bonuses to create “gains” that promote reaching toward the stretch goal.
- Rob Stephens
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