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Flawed Target Setting


Incentive plans are widespread used in the semiconductor and electronics industry and a key tool for management to drive results and motivate employees using target-based incentives of 15-40% of the total compensation plan. Many companies and managers however, are not happy with their target setting and incentive plans, as they do not generate the expected results.

Target setting is one of the most researched topics by organizational behaviour researchers since the early 1960’s (e.g. Vroom 1964, Myer et al. 1965 and Stedry & Kay 1966). Whilst there is consensus that performance targets help to motivate people, there is little unity on what target setting really drives superior performance. Incidents of Enron, the Ford Pinto and more recently the excessive incentives schemes that some believe lead to the 2008 crash, has triggered researchers also to look more into the negative effects of target settings (e.g. Goals gone wild: The systematic side effect of over-prescribing goal settings – Lisa D. Ordonez et al.).

Finding the optimum target setting is the Holy Grail, not only for organizational behaviour research, but also for every manager and executive.

What good target setting has in common

The large amount of available research indicates that proper target settings have the following in common, they are:
  • Perceived to be achievable: independent of whether the targets are actually achievable or not, the perception that they are, already motivates. 
  • Not too easy and not too hard: targets that are too easy to meet do not motivate. Unrealistic targets demotivate.
  • Non-conflicting: with the strategy, direction or values of the company or with other targets or directives.
  • Accepted and committed: various studies have shown that an accepted target by itself, even without an incentive motivates, as it has become the reference to judge performance.
  • Specific and clear: what is the target, how is it being measured and what is the pay-out when the threshold, target or maximum is achieved.

Flawed practices

The new norm in semiconductor and electronics is that there is no norm. The industry has been more volatile than ever before. Shorter design cycles, a more flexible manufacturing infrastructure and large fluctuations in end-customer demand and inventories, have unpredictable effects on production volumes and manufacturing locations. This lack of visibility is the most common issue, which brings us to the top of the list:
  1. Flawed targets: In the absence of reliable forecasts, past performance and growth ambitions are often the chosen reference. Like with investments, past performance can be an indication, but is not a guarantee.
  2. Incorrect allocation: most companies work with top-down targets. During the deployment, they split into regional, area and finally in an individual employee’s targets. This can lead to individual targets that are far from achievable.
  3. Not regularly revisited and adjusted: the speed in which the industry moves out-dates the targets on the moment they are fixed. Quarterly reviews and in some cases monthly reviews are necessary.
  4. Lack of ownership: forcing targets top-down with little discussion eliminates any ownership an employee possibly could have.
  5. Managed and controlled by HR and Finance instead of sales management: for compliance or other reasons.
  6. Dependency or conflicts between targets: typically, front line employees receive a combination of targets. In case that the targets have an inverse dependency like margin and sales, the employee will settle for a sub-optimum.
Regarding the last point, EnFeat did some software simulations. Although these incentive schemes try to promote both criteria, the simulations show that going for a sub-optimum is more beneficial, confirming our experience in the field.

Better practice

Addressing the previous by changing in the way you set targets, can improve significantly the acceptance and commitment to those targets and hence the results:
  • Execute a clear top-down-bottom-up (or visa-versa) approach with involvement of the lower levels and set clear rules to avoid endless discussions, sandbagging or heroism.
  • Empower sales managers with the support of HR or F&A, to manage the process.
  • Be realistic: if targets are unachievable, change them into a shared team target or other targets that still drive the business in line with the strategy e.g. number of new accounts.
  • Do a litmus test:
    • Are the targets in line with the strategy and values
    • Are they specific and clear enough
    • Are they in any way conflicting
    • Do they have a dependency
    • Are they challenging enough
  • Plan the next review cycle halfway the agreed target term

Alternatives

Commission based incentive schemes motivate. However, they heavily depend on the commission versus fixed salary and the actual drive of an employee for more money versus the effort he has to do. Next to that, top earners are not necessarily top performers and those schemes can promote behaviours that are not in line with the company strategy or goals. A major reason for companies to change from commission based to target based incentives.

Discretionary bonuses are uncommon in sales and marketing organizations. As part of a hybrid incentive scheme, it can correct somewhat the flaws of the target setting process. Management could communicate at the beginning of the period that x% of EBIT is allocated for discretionary incentives for managers to allocate to employees based on performance.

Increase event rewards: an employee did a good job or achieved a given target within a given deadline and receives a bonus or reward that, dependent on the achievement, can range from a few hundred dollars to a multi-month salary. If done correctly, it not only rewards the correct behaviour and the achievement of that person, it will motivate others as well.

Final words

Target setting and incentive plans are part of the overall organization’s performance and incentive system and for most; it is likely to be flawed. The Holy Grail of target settings does not exist. Nevertheless, if you feel that your current target setting does not give you the expected results, it might now be a good time to look at refining it, starting with some simple measures to improve ownership and commitment.

© 2011 EnFeat
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