By Ryan Davies, Hugues Lavandier, and Ken Schwartz
Aggressive goals can dramatically improve a company’s performance. But unachievable goals can do more harm than good. Here’s how to stretch without breaking.
The urge to improve is innate in most companies, where better service, stronger performance, and faster operations are inextricably tied to earnings, bonuses, and shareholder returns. The impetus is so strong, in fact, that the practice of setting stretch targets for a company’s performance has become emblematic for the grit and aggressiveness expected of a modern executive. Managers take pride in seeking to achieve the unthinkable.
Sometimes they succeed, surprising even themselves with how much stretch targets can improve performance. But there are limits to how far they can push. The wrong metrics can sap motivation and undermine performance.1 Targets set along one metric without regard for the effect on performance elsewhere can destroy value. And broad-based aggregate measures of profit margin, operating profit, and earnings per share are only loosely linked to valuation. One CFO recently admitted to us that his multibillion-dollar global company would hit its quarterly goals for earnings before interest, taxes, depreciation, and amortization (EBITDA), but only at the cost of reducing its operating cash flow. Signs of unhealthy stretch targets can be quite clear—and any of them can lead to poor behaviors, distracting senior managers and having no impact on value.