Myths about Target Setting during your Budgeting Process

The world of management is full of myths and rituals. Many seem to have been with us forever, often explained and justified as “we have always done it like this”. Some have a shorter history, often introduced because “everybody else is doing it”.

One of these rituals definitely feels like it falls into the first category. Target setting seems always to have been there. In most organisations, this is actually not true. The situation was quite different if we went back 20-30 years. There were far fewer targets around. Yes, there were (and still are in many organisations) detailed budgets which often represented targets. These were mainly financial numbers, however. The birth of the Balanced Scorecard in the late nineties led to a massive increase in non-financial metrics, resulting not only in much more measurement through KPIs but also in much more target setting on these. This new way of managing later spread to the public sector, where “New Public Management” has also led to a massive increase in measurement and target setting.

Along the way, we seem to have forgotten that “the target is not the target”. It is not about hitting a number. What we really want is the best possible performance, given the circumstances. Setting targets is one way of achieving this, but not the only way and, too often, not the best way.

The target myths

Rituals aren’t necessarily a problem. Myths are different because they are typically not true. There are three strong myths surrounding targets, all seemingly undisputable justifications for this popular management practice.

• Without targets, people won’t know what to do
• Without targets, people will not be motivated to perform
• Without targets, we are unable to evaluate the performance

These myths are, however, not just disputable. They are simply not true. Here is why.

Let me first make a clarification. The targets and the target setting I challenge here are numerical targets. They are very specific, different from more general ambition statements with rounded numbers; ”in the range of”, or “towards”. In addition, they are absolute, not relative, where own performance is compared with others. They are typically set from above in order to control, punish and reward. I have fewer problems with targets people set for themselves to learn and improve, although also these can be problematic if taken too literally.

“Without targets, people won’t know what to do”. Not true. Words can often address direction and expectations much more clearly and intelligently than what any single number can do.

“Without targets, people will not be motivated to perform”. Not true. Many, including myself, are much more fired up by the right words, igniting our hearts in a very different way than those clinical and decimal-loaded numbers which only reach our brains.

“Without targets, we are unable to evaluate performance”. Not true. This one might be the most solid myth to bust, so let us dive a bit deeper here.

No target - no performance evaluation?

A target is trying to describe what good performance looks like at one point in time down the road, for instance, at year-end in the case of an annual target. This is often quite difficult, especially when there is a lot of uncertainty that we can’t control. Where is the market going? What will competitors do? And what about the oil price and exchange rates? We have to make a number of assumptions about all these uncertainties, forcing us to be quite subjective even if we don’t want to. But when we finally land on a specific number, the subjectivity seems to disappear. Now it has all become more orderly, and we can focus on measuring whether we are hitting the number or not.

What we have been through, however, is actually a premature performance evaluation and quite a difficult one due to all that uncertainty forcing us to make all those guesses. Wouldn’t it make more sense to do this job afterwards only, when all the uncertainty is gone? We then know what happened with markets and competitors. We know how the oil price and exchange rates moved and a lot more. Why should we let a yardstick decided twelve months ago be the judge when we can now look at facts instead of basing us on all those guesses we made back then? Most of us know what good performance looks like when we see it.

Targets work. That’s the problem.

Many will still argue that target setting works. “What gets measured gets done”. Yes, targets do work. That is actually the problem. Managers hitting their target is, however, no guarantee whatsoever that this was their best possible performance, given the circumstances. Maybe some could have performed even better because assumptions changed. Others had a lot of headwinds and might have performed great even if they didn’t hit their target. But we only know this afterwards!

Targets are often expressed through KPIs. Those still insisting on setting targets should not forget that the “I” in KPI stands for “Indicator”. They are seldom telling the full truth, which probably is why they are not called “KPT”s; Key Performance Truth. We have to look behind the indications before we can conclude.

Zooming blindly in on targets can, therefore, be highly problematic, even dangerous, also when there is no change in assumptions. Volkswagen and Wells Fargo are recent and sad examples of blind KPI target management running the show.

A holistic performance evaluation

If we do set KPI targets, both the uncertainties discussed require that we take hindsight insights into account:

• Indicator uncertainty - how big is the “I”?
• Target uncertainty - what is the right number?

In addition, there are also other questions that should be asked in such a holistic performance evaluation. How did we achieve our results? Which risks were taken? How are sustainable the delivered results?

Some would argue that all this assessment on top of measurement makes the performance evaluation too subjective. They prefer the objectivity of only looking at actual versus target, end of the story. But as we just have discussed, this is an illusion of objectivity due to all the subjectivity going into the target setting in the first place.

The longing for full objectivity might also have something to do with managerial laziness. It is obviously much easier to compare two numbers only and conclude. Making a deeper performance assessment by looking at what really happened and digging behind measured results in order to reveal the true underlying performance takes an effort. It takes leadership. Some find that cumbersome, even difficult. But we need leaders with competence beyond the ability to compare numbers. Leadership is not meant to be easy.

If you are new to, but intrigued by these reflections, you might wonder if it’s all nice theory and wishful thinking. It’s not. Many organisations have either skipped or never introduced targets. Check for instance out Handelsbanken or Miles, two great companies who not only operate without targets but also without most other management rituals, including budgeting.  

There is a better way!

P.S. Linking incentives like the individual bonus to targets will only turbocharge the many challenges described above. It also opens up another management myth; what is it that really motivates us? This topic is so big that it deserves its own article. Stay tuned!