Too much of a good thing – the diminishing marginal return of using goal setting

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photo by apesara

In this blog I deal a lot with subjects that are not clear cut. You can’t really say that there is one correct way to manage people or to be a leader. There are thoughts. There are ideas. There are principles. That being said, sometime, I get to see things I write about actually happen or get supported by the outside world.

A few days ago I wrote about measurement and evaluation and how we need to change the way we interpret data and the way we measure people’s performance. A day after that, I read this article from Knowledge@Whartoncalled: “‘Goals Gone Wild’: How Goal Setting Can Lead to Disaster” describing new research that suggest that the use of goal setting to motivate and measure performance is wrong. a short excerpt:

The paper is full of cases in which goal setting had negative and sometimes disastrous consequences for a company. Indeed, executives and business experts in those cases frequently failed to realize the prominent role that overly ambitious targets played in causing the eventual problem. One famous case that Schweitzer and his co-authors relate is the storied 2002 collapse of the energy-trading giant Enron. They cite literature noting that the once high-flying Houston-based firm used goals and an incentive system for its salesmen that was based solely on the volume of revenue that they generated — and not whether the actual trades were sound or profitable — which became a key factor in Enron’s implosion.

If you think about where the goal setting has been used wrong you come back to using the wrong measures and to using the data we have just because we have it. In order to use goal wisely, we should think about the implications of the goal we chose. A real life research talking about the things I just wrote about.

This made me think. Like in many other areas of life, too much of a good thing is bad thing. In economics, it is called diminishing marginal returns. The benefits become smaller and smaller the more of something you use.

Business has a tendency to take things to the extreme. If something works, companies tend to implement it vigorously and across the board. The more time passes, that “something that works” that has been implemented with enthusiasm, becomes the norm. Then, it is done automatically, without a lot of thought, because it is easier and because everybody does that or we always do it like that. And because, as I said in the beginning of the post, management, leadership and dealing with people is never exact and thus, can never be done without proper thought, the thing that originally worked ends up hurting more than benefiting.

This is exactly what happened with goal setting. It is a good idea implemented too much and without enough thought. I don’t think that the article actually tries to say, hey – goal setting is totally wrong. It just says that it is a good thing that is used in a wrong way.

Elad

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4 Responses to “Too much of a good thing – the diminishing marginal return of using goal setting”

  1. glennfrancis Says:

    It’s a flavor of the day run amok for sure, Elad. I do a lot of work with companies around the globe. Whenever I suggest to them that they might want to revamp their review process to make goals set for employees more strategically sound I always get a “You don’t know anything, do you?” kind of look. A lot of managers have come to believe that the stretch goal is the real goal. When employees have trouble delivering, morale decreases and cynicism grows. Without linking performance goals to strategy and ensuring that the goals are consistent with other employees’ goals (therefore achievable as a team), we risk creating a Dilbertesque company where meltdowns like the Enron fiasco become far more likely.

  2. sherfelad Says:

    Wow! Glennfrancis. You have done in one sentence more than I could have done in a full article with my limited English. Right on target. Kudos and thank you for that comment. I especially liked the use of the term “Dilbertesque”. As a Dilbert fan, I can really appreciate that one.
    One thing though. Isn’t the fact that managers keep looking at you with that “you don’t anything face” just makes it the more important to break this wrong conventional wisdom. I think it means people like us just have a bigger challenge in front of us and a bigger opportunity to change the world!
    Hope to see more of your comments here in the blog!
    Elad

  3. Practical implications of the “Paradox of Choice” « The Comparative Advantage Says:

    […] to see in many facets of life it pertains.  Just this last week I wrote about it twice (1, 2). This is the third time. Because Schwartz’s conclusion is basically an implementation of […]

  4. Should we set goals as leaders or as managers? « The Comparative Advantage Says:

    […]  The problem is – and being in a MBA program myself right now, I can see it personally -the conventional wisdom is that management and leadership is the same thing. That all managers should also simultaneously be leaders. This makes managers, who should focus on their employees and the short-term achievable goals, focus instead on the far future, setting far and unreachable goals. It also puts people who do not have the talent and skill to deal with the long term future, deal with it. What follows is wrong use of goal setting that leads to disaster. […]


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