The Peril of Stretch Goals: Why They Can Be Demotivating & Dangerous

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May 1, 2012

Dan Markovitz’s recent Harvard Business Review post on The Folly of Stretch Goals brings to mind a development in my own management incentive plan design work over recent years, as my clients and I address heightened concerns about risk and unintended consequences.

Markovitz, in his call for us to dispense with “the management absurdity known as ‘stretch goals,’ ” lists three important reasons that their demise is necessary. (None of which, hopefully, will come as a surprise to anyone working with employee rewards.)

  • Stretch goals can be terribly demotivating.
  • Stretch goals have a dangerous tendency to foster unethical behavior.
  • Stretch goals can also lead to excessive risk taking.

The problem lies in the execution

I’m not sure that there was a problem with the original intent and spirit of stretch goals – that of setting expectations beyond the “easy lay-up” and encouraging ongoing improvement in performance. The problem lies, as it often does, in the execution.

We have taken a sensible concept and – in way too many situations – created a monster. As a result, stretch goals (and their close brethren, the BHAGs) have become a symbol of excess, of pushing people beyond reasonable or rational limits. Throw in some big cash incentives and you have the perfect recipe for potential disaster.

What does this mean for incentive design? A lot, clearly. But one particular design feature I see it impacting – and that I wanted to highlight here – is where we set plan performance thresholds (or minimums or hurdles). These represent the lowest level of performance – overall or on any individual plan metric – which earns an award.

The classic performance-to-award structure that I was raised on suggests that you typically set threshold at 80 percent of target or “hoped for” performance. Like any rule of thumb, of course, these guidelines should be tempered with one’s “on-the-ground” experience and an understanding of the context and circumstances surrounding an incentive plan.

It’s all about “smaller” wins

That aside, though, I am finding that my clients and I are increasingly inclined to set thresholds at lower levels than in the past – to not require the same level of “stretch” in order for some award (however small) to be earned. We do this for a host of different reasons, but many of them track closely with one or more of the three points made by Markovitz in his blog post.

What we are striving to do, in reality, aligns closely with what Markovitz prescribes as the antidote to stretch goals: focusing on and rewarding smaller wins in combination with organizational improvement. Which, when carefully done, ensuring the right balance between the value of performance achievement to the organization and the value of awards to individuals, is one way to move toward healthier plans and outcomes.

Any similar – or contrasting – experiences and stories out there? Would welcome readers’ thoughts and opinions on this!

This was originally published on Ann Bares’ Compensation Force blog.

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