Why Two Financial Targets Can Be Better Than One

By Scott Whitbread and Mark Rosenbaum

(Originally published by Harvard Business Review)

As consultants, we once helped a manufacturing plant director discover how we could save $20 million from his costs in the coming year. His response? “I don’t want $20 million. I only need $3 million to meet my objectives. Why would I contribute more than that?” The director contended that delivering the full improvement would hurt him in two ways. First, it would make it seem as though he had “sandbagged” his budget. If there was $20 million of cost saving available, why had he only offered to produce $3 million? Second, were he to deliver the full improvement that year he would be giving up $17 million “for free” that could otherwise be reserved for achieving future years’ budget commitments.

If you’ve worked in business long enough, you’ve probably encountered this type of provincial thinking from both managers and team members. It can be hugely costly to organizations. 

When a manager and their team members negotiate a goal between themselves, they can easily lose sight of their shared objectives. The team member, seeking to under-promise and over-deliver, comes to see success as reaching (but not exceeding) the goal and thus to see depressing the goal as a legitimate path to success. The manager, knowing the team member is seeking a lower goal but will likely achieve the level they agree upon, seeks to raise the target. The team member views the agreed-upon target as a performance floor, the manager, as a performance ceiling.

The result is a goal that leaves both parties dissatisfied, is probably less than can be achieved, and is unlikely to tap into the employee’s higher motivations to excel.

There are a few standard techniques for rectifying this problem. One is the “rubber band theory” of arriving at goals that create an appropriate amount of stretch for the employee. Another is managers autocratically telling their team members: “hit this number, or else.” Yet another is having employees propose their own budgets for their manager to adjust. None of these techniques, however, escape the basic notion of this goal-setting process as a a zero-sum negotiation.

So what’s the solution?

Overcoming the pitfalls of negotiating a target begins with acknowledging that two goals are seeking to emerge. The first is the employee’s self-determined, aspirational goal. This is the level of performance that they themselves would be proud to have achieved; a true test of their capability, achievable only with a valiant effort. The other target is the minimum level of performance the manager needs to justify their commitment to the employee’s endeavor. While it is probably less than they want, it represents what they need to keep going.

So why not set both goals?

Trying to mash two goals into one tends to destroy the meaning of both while producing a contentious shared goal that both parties suspect to be conservative. Instead, setting both goals, and allowing them to coexist, unleashes the employee to strive for excellence. Presuming their self-determined, aspirational target exceeds their manager’s minimum expectation, they are free to pursue it without fear of falling short. By aiming for stars they are bound to achieve more, even if that means only reaching the moon. And by focusing their attention on their aspirational goal, they are giving themselves the best chance of exceeding their manager’s minimum expectation.

In cases where the level of performance the team member aspires to is less than their manager’s minimum expectation, then this should be acknowledged and we shouldn’t expect the negotiation to resolve the discrepancy. However, in our experience, these instances are few. When the two parties are no longer second-guessing each other’s intentions, and can be transparent with their true needs and aspirations, there is typically a substantial overlap between the manager’s requirements and the team member’s ambitions.

To put these ideas into practice, a commodity food business we recently worked with began encouraging some of its facilities to set a “BHAG” (Big Hairy Audacious Goal) for conversion cost-per-unit while at the same time mandating a budgeted conversion cost. The budget mandate was a slight improvement (2%-3%) on the prior year’s performance (a common practice for this type of business) while the facilities were free to determine the degree of stretch beyond this that would be built into their aspirational goal. At quarterly performance reviews, the budgeted conversion costs were acknowledged but the focus was primarily on how each facility was tracking toward its BHAG and what it could be doing to strive further. These reviews were upbeat and creative rather than anxious and defensive.

Two years after implementing the approach across 32 of their 80 facilities, the pilot facilities had reduced their conversion costs by over three times the amount mandated by the budget and by 10% more than the non-participating facilities. A number of them actually surpassed their BHAGs while none fell short of their budgets. Several years later, the business has implemented the approach across all of their facilities and continues to employ it today.

As this company found out–sometimes, two goals are better than one.