The Perils of Stretch Goals and High Incentive Hurdles

Dan Markovitz's HBR blog post, 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 managment 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.)

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

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% 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.  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 above.

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!

Creative Commons image "Jump!" by cpboingo

Comments

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[E. James (Jim) Brennan]

Ironic, ain't it, with the Citigroup CEO recently slammed for getting patty-cake easy goals as discussed here http://www.compensationcafe.com/2012/04/heres-what-the-wall-street-journal-had-to-say-this-morning-about-the-loud-no-they-heard-from-55-of-citigroup-shareholders-wh.html. Shareholders demanded more stretch goals!

Personally, I never found symmetrical goal models with gates very realistic, although they appeal to many in our field. Curves with various leverage rates always seemed to work best in my experience. They were actually easier to understand and communicate, too, rather than the "feast or famine" options. For example, aggressive leverage (ratio of reward to achievement improvement rate) while moving ROI from -10% to positive 5%, a rise from there to 15%, then gradual easing of payoff rates until a steep drop at the 30% ROI level where you want them to back off, stop pushing aggressively and keep things steadily profitable, moving to a maintenance mode rather than remedial/maximizing. Just an illustration, mind you, showing how you can build long term strategy into your remuneration tactics.

[Wally Bock]

I love the post, Ann, but I want to go off-point a bit and address the issue of BHAGs. In my world, BHAGs are never individual, only organizational. As my friend Stephen Lynch says, "They're the choice of which mountain to climb." When they work well, they're multi-year and inspirational. That's the way they were described in Collins' and Porras' Built to Last. When we try to turn them into a short-term motivational tool it's like using a hammer to stir soup.

[Ann Bares]

Jim:

Ironic yes - and a confirmation of the level of care and balance that sound incentives require.

Wally:

You're right - and the issue is that of the long-term inspirational BHAG, as Collins and Porras presented it, being repurposed for short-term achievements.

Thanks - both for the insights and comments!

[Monster Headphones Beats Turbine]

If I have seen farther than others, it is because I have stood on the shoulders of giants. Road is stepped by feet, history is written by people. Every step of man is writing his own history.