Thursday, January 13, 2011

‘Stretch goals’ tend to stretch all the way into fraud

Goal setting works. Give your employees some concrete goals and they will work harder to reach them than when you just tell them “do the best you can”. There are ample studies confirming that relationship. Professors Edwin Locke and Gary Latham, from the University of Maryland and the University of Texas, even called goal-setting “the most effective managerial tool available”.

So, I am not arguing with the effectiveness of goal-setting, but I would say it should come with a health warning. And that is because it also induces some more dubious behavior.

Let me explain. “Stretch goals” is one of these terms that have persistently entered managerial vocabulaire, earning a prominent and enduring place in consultant speak. The idea is that you set your people goals that they might just reach if try really really hard – or just not. Hence, they stretch your people’s effort to the limit.

However, there is a little catch to that. We also know from research that if people almost reach this goal (but, crucially, not entirely…) they tend to make it up.

Cooking the books

Really – quite literally. If they almost reached the stretch goal but not entirely, they will be inclined to pretend they did, and cook the books. Professors Maurice Schweitzer for the University of Pennsylvania, Lisa Ordonez from the University of Arizona, and Bambi Douma from the University of Montana designed a clever experiment. They gave seven random letters to 154 participants and asked them to create as many words as they could within a minute, writing them on a workbook. If they came up with 9 words or more they would get a monetary award. And they did that 7 times. The participants had to record themselves how many words they got each round and, at the end of the experiment, hand in a notebook of their achievements and take the corresponding amount of money out of an envelope. The experiment was guaranteed to be entirely anonymous.

But, unknown to the participants, there was a trick… Although the experiment was indeed anonymous, the researchers could match the workbooks to the notebooks and envelopes with the remaining money. Thus, they could look up how many people cheated (although they were not able to identify their names). And the answer was pretty clear and precise.

Each time people got 5 or 6 words or so – pretty far off the mark of 9 – they reported it honestly and left the money in the envelope. However, things were markedly different when people had reached 8; just one word short off the mark. In that case, a significant number of people cheated: they filled out that they had come up with 9 words and took the money out of the envelope, although their workbooks clearly showed they had missed the mark by 1 word. They cooked the books and deceptively misappropriated the corresponding monetary award.

It reminded me of organizations like Enron, Ahold, or Worldcom, where management habitually set their people ambituous goals. These firms may have gone down attributing their fall to fraud, but the fraud was induced by the organizational context created, which stimulated their people to cheat. Stretch goals may stretch employees’ effort to the limits, it also stretches their sense of ethics.


Because the interesting question is also, who were they cheating? When people reached only 5 or 6 they could have just as easily cooked the books and taken the money as when they had reached 8. But they didn’t. As a matter of fact, there was no need to fraudulently fill out the notebook at all; they could just have taken the money out of the envelope and leave. But only one out of the 154 participants took more money out of the envelope than reported on the notebook (and even that could have been an honest mistake). So why did people only commit fraud when they fell just short of the goal, and not when they missed it by a mile? And why did they insist on writing the false information in the books, when they could have just taken the money and run?

It has to do with self-justification. It seems we are inclined, when we have been set a stretch goal that we just did not reach, to tell ourselves that we sort of did, and really do deserve the reward. We can’t tell that to ourselves when we are way underperforming and very far off the mark. We also can’t justify to ourselves to just grab all of the money. But when we almost reached the stretch goal (but not entirely…) we humans are perfectly able to tell ourselves a nice little story that permits us to take the loot after all. And the people at Enron, Ahold, and Worldcom were just as human as the rest of us.