Stretch Goals and Organizational Performance

What is it about?

While the general consensus regarding stretch goals is that they boost drive, innovation, and improve organizational performance, this study shows that this is the exception, and not the rule. For many organizations, stretch goals can serve to undermine performance. This paper reports the results of two experiments examining the impact of assigning stretch or moderate goals to managers. More than 80 percent of participants failed to reach the assigned stretch goals. Compared with moderate goals, stretch goals improved performance for a few, but generated higher variation in performance across organizations, increased risk taking, undermined goal commitment, and generated lower risk-adjusted performance.

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Why is it important?

An increasing number of top managements teams and directors have adopted stretch goals for financial performance over the last 10 years. Stretch goals are viewed as a rule for riches. This study shows that stretch goals are not a rule for riches for all organizations. Instead, they lead to riches for a few organizations. Instead of being evidence that organizations should adopt stretch goals, the small number of successful cases is evidence that stretch goals do not benefit most organizations. Many organizations do not benefit and may even suffer from adopting stretch goals. Whether boards or top management should adopt stretch goals in their organization depends on their attitudes toward risk. Those with large appetites for risk may still prefer stretch goals. In venture capital or private equity, the value created by “big winners” can more than offset the poor returns or losses on the majority of organizations in the portfolio. These organizations may also be more able to absorb the poor returns or losses created by aggressive goals. However, for those who are risk neutral or risk averse, stretch goals may not be desirable because of the lower expected risk-adjusted returns. For example, stretch goals may not be appropriate for medium-sized or family-owned businesses that may not be positioned to recover from potential losses.