“The greater danger for most of us isn’t that our aim is too high and miss it, but that it is too low and we reach it.”

Michelangelo

In writing the articles on setting performance levels I came across a Harvard Business Review article on “The Stretch Goal Paradox”. This article describes Stretch Goals as different from ordinary challenging goals in two aspects:

1. Extreme Difficultly – levels that go beyond current capability and performance; and
2. Extreme Novelty – to bring a stretch goal within reach brand-new paths and approaches must be found (that is revolutionary ideas as opposed evolutionary ideas).

Importantly the authors found that the behavioural “consequences of setting and then missing stretch goals can be profound with failures fostering employee fear and helplessness, killing motivation and ultimately damaging performance.” Accordingly, the authors of the article suggest careful consideration whether to use stretch goals vs. more achievable goals.

The reason I am writing about this is many people in developing a Performance Based Contracts (PBCs) want to include incentives for superior performance. The question is whether the superior performance represents a stretch goal based on the definition above or whether it is slightly better performance than the required level of performance (see the earlier article on Setting the Performance Level (Part 1) that describes the fours levels of performance used in PBCs).

In my career I have seen all types of PBCs from those with no incentives for superior performance, those with incentives for superior performance, and even those with incentives for stretch goals. However, as the article suggested , we need to carefully consider the reason for offering an incentive. Is the buyer expecting that superior performance or a stretch goal be delivered by the seller? And does the amount of incentive enough reward the seller for the extra effort (e.g. is the Return On Investment (ROI) enough to motivate the seller)?

In setting PBCs performance levels the use of incentives, and especially those that are stretch goals, should be carefully considered to avoid the same behavioural issues identified by the authors in either the buyer (e.g. an expectation of superior performance) or seller (e.g. seller management will expect the delivery team to always get the extra rewards).  The key to avoiding these behaviours is balancing achievability and stretch levels.