The Science Of Target Setting (And How Most Companies Get It Wrong)
In most companies targets are set by senior management. They might be the result of detailed analysis, crystal ball gazing, or simply adding a percentage to last year’s numbers. However derived, it is almost always done without involving the employees who have to achieve them.
The research on target setting tells us this is not only ignorant but also harmful to the performance of the organization. We advocate what progressive organizations do: set targets in close collaboration with employees, or let the employees set them. Here’s why.
In traditional organizations, top management sets the strategic direction. Subsequently, this is translated into goals, KPIs, and targets that are cascaded down the organization. Departments, teams and employees are then informed of their targets. It’s often the manager’s role to sell the targets to their teams.
And this is where many organizations go wrong. Employees and teams are often not involved in setting their own goals. How can you set meaningful targets for people without their participation?
Senior managers are often not aware of what's actually important in the work on the front line
Dutch assistant professor Bianca Groen conducts research on target setting. She writes: “Senior managers are often not aware of what’s actually important in the work on the front line.”
So what does science say about target setting and performance management? And are there practical suggestions to help organizations do it better?
The science of targets
Unfortunately, not much research seems to have been done on employees who set their own targets. Some has been done, however, on involving employees in the joint setting of targets. Let’s look at some of the findings.
1. It leads to increased performance
Various studies have shown employee participation in target setting leads to better performance. That is, when managers jointly set targets with front line staff, the performance of those employees is higher. Why? Among other reasons, employees feel they have more control over the outcomes.
2. Even more benefits
If better performance is not enough to convince you of participatory target setting, it might help to know of another study that showed setting targets in collaboration with employees led to:
- increased understanding of how to apply the firm’s strategy;
- greater knowledge exchange among employees;
- creation of new knowledge
3. It's more than just target setting
Apparently, it’s not only about setting targets and goals. It’s about involving people in the process. So, if you want you employees to be more motivated (which we assume you do), co-develop these aspects of performance measures: name, purpose, calculation formula, frequency of measurement, data sources, and responsibilities.
4. Self-set targets work
To offer you additional evidence: companies practicing open-book management (a way of working in which employees set their own targets) have demonstrated increased sales and higher profits. Various studies of open-book management have shown higher productivity, higher engagement, motivation, and increased employee retention.
The practice of targets
So what does progressive practice look like around the world? Let’s share some of the things we’ve seen so far:
1. Employees set their own targets
In quite a few Bucket List organizations (viz. FAVI, Belgian Federal Office of Social Affairs, Finext, Haier, Morning Star, Matt Black Systems, and Zingerman’s) we’ve observed the practice of employees setting their own targets. No targets or KPIs are set by senior management. Employees decide what they are aiming for.
At the self-managed tomato processor, Morning Star in the US, they use a so-called CLOU (Colleague Letter Of Understanding) for employees to set their targets. The CLOU details all the commitments employees have made with other employees affected by their work. It makes it easy to understand what results are expected of which person.
This is what the process looks like:
- At the start of every year each employee negotiates a CLOU and corresponding commitments with colleagues who are affected by his or her work. Typically, employees have about 10 CLOU colleagues with whom they negotiate commitments.
- Each CLOU specifies the commitments agreed between two employees: deliverables, goals and metrics.
- The CLOU is used to hold each other accountable for the agreed-upon commitments.
- Every 2 months, relevant business information is shared to track the metrics of the CLOU. The CLOU thus becomes a useful document—not a bureaucratic exercise.
2. Simple and basic benchmarking
Another practice we’ve come across is to simply benchmark progress, and skip the bureaucratic exercise of predicting and budgeting. By simply checking weekly or monthly progress relative to, for example, the same period the year before, organizations can understand where they are without doing frustrating, non-value-adding exercises.
3. Open-book management
Another powerful practice is called open-book management. This is a way to open up important financials, teach people how they are derived, and how they can be influenced. Maybe the most important aspect is that it puts employees in control of setting the targets and, sometimes, the rewards they receive. Then, it’s up to them to find ways to achieve them.
Open-book management puts employees in control of setting the targets (and often also the rewards). Then, it's up to the employees to find ways to achieve them.
What we saw of open-book management at Zingerman’s was exemplary: a 17-year old boy (a dishwasher) explained to us the weekly sales, profit and customer satisfaction numbers. He was only working there for a few months but told us: “In previous jobs I was just expected to fulfil my standard tasks. Since I am working here I feel that I use parts of my brain that I wasn’t using before. I feel like I am actually running a business and that I contribute to it in a valuable way“.
Need we say more?
Reaping the benefits
Many of the progressive organizations we’ve visited around the world reap the benefits of collaborative or self-set targets. Employees take more ownership. It’s hard for a person to set a goal and then say that they don’t want to achieve it. People take more ownership when they make a commitment themselves; certainly more than when their boss makes it for them.
Plus, the organizations we’ve visited report they benefit more from the expertise of employees. Why? Well, if a manager hires the right person, he or she is often more expert or up-to-date than the manager. So why impose goals upon a person if you have less knowledge of the work to be performed?
People take more ownership when they make a commitment themselves, not when their boss makes it for them.
So, taking into account both the research and the various case studies of progressive workplaces, it seems clearly beneficial to forget about imposed targets and KPIs. Instead, invite employees to join in target setting, and (possibly even more powerful) drop the illusion of control: let employees set their own targets. The outcomes might very well surprise you.
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Traditional organizational scaling is broken. Most successful companies grow despite their organizational structures, not because of them. At balena, we make software that powers IoT devices, but we also strive to innovate on our internal structure just as much as we do with our commercial products.
Here's something that might interest many readers: a self-assessment to explore how self-managed your team actually is. As more and more companies experiment with self-management, it's good to understand whether you're exploring true self-management, or just a half-baked version of it.