I remember a surreal conversation I once had with the head of sales in a software business at budget time. 'What's the figure for UK sales next year, Steve?' I asked. 'It's £2.3m,' he replied, 'but we're working on getting it down to £2.1m.' At the same time, his boss, the CEO, was working hard on delaying signing off on some major new sales. What was going on? Had somebody put LSD in the water-cooler? Had I fallen through a wormhole into a parallel universe? No. Both these individuals were behaving entirely rationally. In their positions, I would have done the same. Their problem was targets.
The sales manager wanted to have a low budget for sales, because that made it easier for him to reach his quota and get his bonus. So instead of looking for ways to sell more he was applying his mind to finding reasons why the potential market was smaller than it appeared. The CEO was delaying signing new deals because he had already reached his maximum bonus. He preferred to have the revenue as a head start for next year. But we all know that when you are trying to close a deal, nothing good ever comes of a delay.
This is just one of the dysfunctional results of setting targets - entirely rationally, people tasked with hitting targets game the system in ways that really don't help. It creates bizarre behaviours like the ones described, but it also corrodes trust. You are saying to people: 'I want you to be honest, but I'm offering you an incentive to lie.'
It's also really hard to set realistic targets for other people's results - they know so much more than you, and they decide how much they'll tell you. It's like playing poker with all your cards face up on the table.
Don't mix up forecasts (useful) and incentives (useful, to a point). Set incentives based on absolute measures like growth or margin improvement, not relative to targets. Or at the very least, have the two discussions at different times of year.
Alastair Dryburgh is Chief Contrarian at Akenhurst Consultants. If you would like your business to improve in absolute, not relative, terms, subscribe to his newsletter at www.akenhurst.com.