Stretch goals can have negative outcomes

Stretch goals are believed to inspire a new level of commitment, and can lead to results radically beyond the current output of a firm. Many large firms like Amazon and Tesla use stretch goals, but there is no scientific analysis on the outcome of using stretch goals. For Dr Saeedeh Ahmadi’s PhD research at Rotterdam School of Management, Erasmus University (RSM), she studied the effects of stretch goals on both the behaviour of employees in terms of suggesting new ideas, as well as the quality of ideas submitted. Dr Ahmadi now works at Amsterdam Business School. She found that the paradoxical nature of stretch goals results in both intended and unintended performance outcomes, but with a larger effect on desirable outcomes. Stretch goals change the behaviour of employees both in terms of participation (participating for the first time in an initiative) and engagement (getting involved in that initiative more than once), and their effect is stronger for changing employees’ participation behaviour.

Fortune 500 tech company

The research studied the effect of stretch goals at the individual level on behaviour and performance among service employees of a tech Fortune 500 firm, using multiple sources of data from more than 100 service units. The analysis focused on a multilevel contingency model with unique and detailed data on individual behaviour within multiple units of the company.

Positive effect on behaviour

Stretch goals encourage participation (whether an employee submitted an idea) and engagement (how many more ideas they submitted), and have a far stronger effect on participation. They foster exploratory behaviour to fuel innovation processes in organisations, by increasing participation of employees in idea generation for new business opportunities mainly by encouraging marginal contributors to participate. Stretch goals are not as effective in increasing the effort of those employees who have already been participating in idea generation.

Effects on performance outcomes

Dr Ahmadi: “We also suggested that stretch goals, while increasing the volume of suggestions, wouldn't necessarily increase the quality of those suggestions which was generally supported by the results. Instead, our theory on the importance of quality discernment by the employee suggested that stretch goals would only increase the submission of fruitful new ideas for employees with significant capabilities and knowledge.”

Not a recipe for all: effective for experienced employees

During the research, Dr Ahmadi’s interviews with managers and employees uncovered that the longer an employee was in the organisation the better they seemed to realise positive outcomes from stretch goals.

“We analysed the data again and found evidence that stretch goals only increase the submission of fruitful new ideas for employees who had submitted ideas in the past, those with substantial organisational experience, and those with senior positions in the hierarchy. We, and the company, were amazed by the waste of time and budget spend on ideas which had no commercial value but were just developed because of the sake of stretch goals. Stretch goals are pushing a lot of new ideas with an effect like shooting in the dark,” she said.

Managerial implications

Stretch goals primarily work on the motivation to increase the contribution to new ideas. However, these goals do not seem to provide employees the ability to discern which ideas are worth submitting, and may even encourage employees to submit any ideas irrespective of quality. So managers need to consider the costs of unproductive initiatives, taking measures to reduce them when setting stretch goals encouraging specific activities.

“In addition to direct cost savings, attending to the quality of ideas during their development and submitting less futile ideas can also reduce the negative feelings caused by the process of idea rejection. The feeling of an employee towards rejection of their idea may in turn reduce the recognition of future opportunities which a company of course does not want to happen,” said Dr Ahmadi.

Stretch goals are more effective in encouraging employees that didn't previously invest significant effort to take the goals seriously and motivates them more to generate ideas compared to employees who have been involved in the task before.

And stretch goals are mainly beneficial for employees who already possess the potential to know a good idea from a bad one and have had a longer experience in the company, so managers should not push stretch goals on very junior or unexperienced employees since this may lead to unintended results.

Rotterdam School of Management, Erasmus University (RSM) is one of Europe’s top-ranked business schools. RSM provides ground-breaking research and education furthering excellence in all aspects of management and is based in the international port city of Rotterdam – a vital nexus of business, logistics and trade.

To learn more, look into our open courses on strategy and innovation >>