Item: Not too long ago, GM (GM) executives wore buttons bearing the numeral "29" as a constant reminder of the company's lofty goal of 29% U.S. market share. Today, a little over six years later, GM's U.S. market share, according to Autodata Corp., is below 20% and sinking.
Item: As recently as the fall of 2006, a press release from the U.S. Housing & Urban Development Dept. trumpeted the success of Fannie Mae and Freddie Mac in exceeding HUD's "affordable housing" goals for the previous year, including goals for "special affordable families."
What do the two items have in common, beyond eliciting a similar sense of irony and sadness? In both instances, goal-setting was used carelessly. If this is not the main cause of today's auto and housing crises, overly narrow goal-setting has certainly contributed significantly to them and, therefore, to our current recession. In GM's case the relentless pursuit of market share came at the expense of profitability. In the case of the collapse of Freddie and Fannie the aggressive pursuit of highly specific performance goals in home buying came at the expense of fiscal discipline.
Huge Bonuses as the Ship Sinks
Faulty goal-setting was a major factor in the last recession too, most obviously in the fate of Enron, which experienced both rapid financial success and then spectacular failure by setting ambitious goals based on sales volume instead of profit. Even during Enron's final days, its executives were rewarded with large bonuses for meeting specific revenue goals. By focusing on revenue rather than profit, they drove the company into the ground.
In the search for villains that seems an inevitable part of recessions, here is one place where the guilty can argue that they were acting in accordance with what is widely considered to be best management practice. For decades goal-setting has been promoted as a panacea for improving employee motivation and performance in organizations. Across hundreds of experiments, dozens of tasks, and thousands of participants on four continents, the results are clear: Compared to vague, easy goals (e.g., "do your best"), specific, challenging goals boost performance.
In fact, goal-setting has powerful and predictable side effects. Rather than being offered as an "over-the-counter" salve for boosting performance, it should be prescribed selectively, presented with a warning label, and closely monitored.
Goals may cause systemic problems in organizations due to narrowed focus, increased risk taking, unethical behavior, inhibited learning, decreased cooperation, and decreased intrinsic motivation.
Here are 10 questions to ask before setting goals, along with possible remediations:
1) Are the goals too specific?
They should be comprehensive and include all of the critical components for a company's success.
2) Are the goals too challenging?
Provide skills and training, and avoid harsh punishment for failure.
3) Who sets the goals?
The process should be transparent and involve more than one person or unit.
4) Is the time horizon appropriate?
Short-term efforts to reach the goal should not harm investment in long-term outcomes.
5) How might goals influence risk-raking?
Be sure to articulate acceptable levels of risk.
6) How might goals motivate unethical behavior?
Multiple safeguards may be necessary.
7) Can goals be tailored for individual abilities and circumstances while preserving fairness?
Strive to set goals that use common standards but also account for individual variation.
8) How will goals influence organizational culture?
Consider setting team-based rather than individual goals.
9) Are individuals intrinsically motivated?
Avoid setting goals when intrinsic motivation is high; the goals will be superfluous at best and may even diminish people's zest for the task at hand.
10) What type of goal is more appropriate—performance or learning?
In complex, changing environments, goals related to learning may be more effective than those related to performance.
In view of the many ways goal-setting can go wrong, why have hundreds of experiments failed to raise a warning flag? The main reason is that most research has been conducted in simple, well-specified domains with well-specified performance measures. Laboratory research is all well and good, but it is in complex, natural settings that goals do the most harm—situations where outcomes are interdependent, monitoring is difficult, and cheating is possible. As all too many real-world examples demonstrate, the harmful effects of goal-setting deserve renewed scholarly and managerial attention.
Editor's note: This piece is adapted from an article authored by management professors Lisa Ordonez, University of Arizona; Adam Galinsky, Northwestern University; Max Bazerman, Harvard Business School; and Maurice R. Schweitzer, Wharton School, University of Pennsylvania, in the current issue of Academy of Management Perspectives.