Setting overly ambitious goals doesn't have the positive outcome many organizations are striving for, new research finds.
A study recently published in the journal Organization Science revealed that, rather than boosting drive and innovation and improving organizational performance, stretch goals more often undermine a company's performance.
"We find that stretch goals are not a rule for riches for all organizations," said Michael Shayne Gary, one of the study's authors and an associate professor at the University of New South Wales Business School in Sydney, in a statement. "Instead, they lead to riches for [only] a few organizations."
For the study, researchers assigned either stretch or moderate goals to a group of managers using a computer-based business simulation program. The study's authors found that about 80 percent of the managers failed to reach the assigned stretch goals. [Struggling to meet your goals? Why stress might be to blame]
In addition, the stretch goals only improved the performance for a few of the managers. Most of the participants ended up abandoning the aggressive goals in favor of lower self-set goals or were forced to adopt a survival goal when faced with the threat of bankruptcy.
In the end, the researchers discovered that stretch goals produced higher variation in performance across organizations, created large performance shortfalls that increased risk taking, undermined goal commitment and generated lower risk-adjusted performance.
"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," Gary said. "Many organizations do not benefit and may even suffer from adopting stretch goals."
The decision on whether or not to set stretch goals really comes down to an organization's attitude toward risk, according to the study's authors. They said employers who don't shy away from risk may prefer to set overly ambitious goals. In addition, venture capital or private equity organizations that can offset losses from the majority of their portfolios with the gains of just one of their investments may also feel more comfortable setting aggressive goals.
On the other hand, for risk-neutral or risk-averse businesses, stretch goals may not be a good option because of the lower expected risk-adjusted returns.
The researchers said that, based on their results, stretch goals might not be a good fit for smaller organizations that are not in a good position to recover from possible losses.
The study was co-authored by John Sterman of the Sloan School of Management at MIT, Miles Yang of Curtin University in Australia and Philip Yetton of Deakin University in Australia.