Podcast EP 105 | Why Stretch Targets are Garbage

Stretch targets are garbage.

People set stretch targets in the hope that they will motivate a team to achieve better results than they otherwise would. In most situations however, they don’t work and actually create a set of second-order consequences that run against the steady, consistent growth of a business.

This week Brad Giles and Kevin Lawrence talk about 6 reasons why stretch targets don’t work, and what you should focus on instead. Be ambitious – and be confident in your ambition.




Please note that this episode was transcribed using an AI application and may not be 100% grammatically correct – but it will still allow you to scan the episode for key content.

Kevin Lawrence  00:13

Welcome to the Growth Whisperers podcast where everything we talk about is related to building enduring great companies, companies that grow and succeed for decades. I’m Kevin Lawrence with my co host, Brad Giles. Brad, how you doing today?

Brad Giles  00:30

Fabulous. Fabulous. Finally, it’s starting to cool down in this part of the world. My new book is progressing well, hopefully coming out mid year. How are you doing, Kev?

Kevin Lawrence  00:52

Great, I just came back from Hawaii, which is a very warm place to give myself an extra boost of warmth. So what do we have on today?

Brad Giles  01:18

Today, we are talking about stretch targets.

Kevin Lawrence  01:53

I remember the juvenile version of myself in my early 20s would do this stuff all the time. And then you wonder why it didn’t work seems very logical, and usually blows up in your face. So we’re going to dig into stretch target targets being garbage today. But before we do, real quick word of the day.

Brad Giles  02:13

The word that I took is behaviors. So I’ve been doing some work on behaviors as a subset of core values. So just thinking about what are the behaviors that lead to the core values I’ve written about in the new book, and I’ve been doing some work with teams. So yeah, what are the behaviors that we expect of our teams? And how do they contribute to our core values? And what about yourself ?

Kevin Lawrence  02:37

Yeah, and by the way, I’ve seen some great work done on that, where you have the values, and then you list a couple of behaviors that show living it and some cases not living that core value really helps to crystallize where it is, I love that great thing to do. Mine is also a bit of a behavior, it’s called drooling. And the value of drooling and that’s like where you’re sitting there and saliva sort of starts coming out of your mouth. And I just reminded of the power of drooling when I was on vacation for 10 days. Because it’s it’s almost a reference to relaxing, downtime, recovery time. And just, you know, for people like us that are GO GO GO GO, GO GO GO and then some having what I call drool time and the value of that. So the value of different behaviors, including drooling is what the theme is today. That’s probably not a pretty picture. We should probably move on, Brad. So let’s get right into what we’re talking about today. And you know, this garbage cold, stretch goals,

Brad Giles  03:40

hang on Stretch, stretch targets. They’re really useful. Like what oh, yeah, like they matter. They make a really, they make a really big difference to our team. They motivate teams, they totally do.

Kevin Lawrence  03:58

And it’s like, hey, you know, let’s aim for the stars and land on the moon. That’s how it works. If you don’t aim for the stars, you’ll never get to the moon. What Wait a second. When when the US decided that they were going to go to the moon? Did they aim for the stars? I think we just had a moment of brilliance there but I’m quite impressed with myself. But then oh, they didn’t aim for the frickin stars backwards. Sorry. Freaking they aimed for the freakin stars and go to the moon. They aim for the moon and they went to the moon. So we just blew up the whole theory of stretch targets because the people that went or supposedly went to the moon didn’t aim for the stars. Isn’t that awesome?

Brad Giles  04:47

No, that is awesome. That is awesome because you know it’s It was a clear goal that people knew people rallied behind for years. They knew when they achieved it, and they knew when they didn’t achieve it. Right. So, so I guess we’ve seen enough stretch targets to, I would say, now be able to say that they’re garbage like that they have some real structural problems, that that I think the two of us are able to defend our perspective. Now, we may not be right in some people’s eyes. But you know, to put it out there and say, stretch targets and garbage and here is why is what we’re kind of pushed today.

Kevin Lawrence  05:46

Yeah, and I’m just thinking about that from like, if NASA and the US to said that we’re good to go and have a mission to the stars, yeah, no one would believe it. That’s Looney Tunes, they pick the specific thing and aim for it, and rally people. Now, it was a big goal. But it was a big goal that they knew they could well, they believe that they could get to and that’s what we’re going to dig into here today. Is you know, and the reason my structure and when I’ve been involved in them in the past, because I used to be bad at setting them with people that we worked with, is I did think of motivated people. And it made them think bigger, and it made me feel good. Now, we often do use a stretch target, but it’s something that said 25 plus years in the future. And that’s something called a B hag as per Jim Collins is thinking and his research. But that’s, that’s 25 years in the future, and you got time to be able to get there, we’re talking about short term things that people aim for that generally, they think is motivational and ops, often it does the opposite. And it D motivates people. And it takes the wind out of the sails of the organization, because they have to keep showing up and saying we didn’t hit it. We didn’t hit it, we didn’t hit it. And that sense of constantly losing or failing, doesn’t usually build a lot of motivation in companies. Missing once is one thing versus chronically missing.

Brad Giles  07:13

I love that moon analogy, because it equally, it’s clear and everyone can understand. But equally, imagine if you were in a running race, or even better a car race. And you said, Now I know that the Formula One goes for an hour, let’s say but we’re going to aim to go for an hour and 30 it would change your whole plan, you would be like, Oh, well, we need this many tires. And we need that much fuel. And we need to have that many pitstops. And you’re preparing for something. difference, right?

Kevin Lawrence  07:45

You prepare very differently based on what the if you know your business well, and what you’re aiming for? Well, yeah, so look, you might have had successful stretch targets here. And there. The challenge is, is it’s generally and I would call it in my experience earlier in my career, a bit of a juvenile, you know, getting excited, and we’re going to set something big, and often overselling it. And then disappointing and, and not only do you disappoint the people involved in it, you could disappoint the people that might have benefited from what you were doing or if it was a customer or something else. And so it’s just, you know, it’s a dangerous, dangerous territory. And people do it because they think it motivates people. And actually, we believe it does the opposite. Well, it’s a it’s a poor motivation tool.

Brad Giles  08:31

There are other motivation tools that are designed or are fit for purpose. This creates massive second order consequences in the organization, if you are using stretch targets.

Kevin Lawrence  08:46

Yes. And as people who have been setting goals with organizations and you know, I’ve done 1000s of strategic planning sessions, as you have read, it’s, we’ve learned that’s not the way to do it. Now, a little bit later, we’ll share a couple of techniques if you want to stretch, but stretch targets themselves aren’t and so the only a couple of points to remember is the first thing is that management’s job is to accurately predict performance. And it can be both ways. You just think you don’t really want to overshoot, or you want to undershoot you’re trying to nail what can we achieve? That would be hard, but doable? Because if you don’t, you know, if you create problems with your banks, your shareholders, your employees, your customers, because you’re not producing as you said, you should it was really interesting. I have one very successful chairman who owned a number of different businesses. And he would get just as upset when someone over achieved a profit target than when they under achieved a profit target because his belief was look, if you under either way, it’s mismanagement, you should know your business and be able to run it well. If they under achieved it. Then we know that either they didn’t budget right If they didn’t do that, well or, you know, they didn’t consider all the risks and opportunities, or they didn’t run the business. Well, you know, throughout the year, when they over achieved it, he would almost get more upset because he’s like, and by the way, if they underachieved it, that also means he would have to give them cash, or it wouldn’t produce the cash it was supposed to for the mothership. And that affected their investment strategies for other parts of the business. When people would overachieve. First of all, he’d be like, well, you know, in his not His words, my words that people were sandbagging. They were under setting a target so they could easily get their bonus. And the other thing that bothered him, he said, Look, if I knew I’d have a number, no, I know have an extra 10 or $20 million, I would have made different plans for that capital. If I knew I would have it, I could have invested it, or put it in other businesses or other programs or back into business if I knew I’d have that extra cash. So interesting. First time, my career so he’d be equally frustrated if someone underachieved as if they overachieved because it’s basically mismanagement and potentially screwing up or affecting the balance sheet of the mothership.

Brad Giles  11:09

Yeah, it demonstrates that you’re not in control of the business that you’re kind of rolling the dice, as, and there isn’t a sense of predictability. Now, I understand that some things, you know, happen, and some things grow faster. And we’re not really talking about that what we’re talking about is, this is what we’re going to achieve full stop.

Kevin Lawrence  11:33

Yes. And we’re saying here, we’re not saying not to be ambitious, be ambitious. But just make darn sure that you’re committed and confident so that you have the determination to deliver. So be ambitious, but be practical about your ambition. And don’t say we’re going to go to the stars, when you know, getting to the moon would really be the right goal.

Brad Giles  11:54

Yeah, you’ve got to be ambitious and confident enough about your business plan that you can lock in an ambitious target. Whilst the second thing you know, is the bipolar sense of having two sets of books? Ah, it is, you know, it’s so frustrating when people say, so we’ve got a set of books for the bank, and we’ve got a set of books for the leadership team. It’s like, where does that seem like a good idea?

Kevin Lawrence  12:32

And to clarify, we’re saying set of books as in goals and budgets, not we’re hiding cash away from certain people in falsifying books, we’re just saying, like, like some, you know, some companies used to run two sets of books, you know, one for taxes and one for themselves. But this is more of just, you know, two sets of two notably different goals that they’re driving to.

Brad Giles  12:59

And why would you want to have a different set of goals or books or targets for the bank? Because you don’t have confidence, and you don’t have control over what you’re executing in the business? And, and that stems from again, be ambitious, but be confident in your ambition.

Kevin Lawrence  13:22

Yeah, and we could argue, and I can think of a couple scenarios, where you might give the bank a softer number, right? Like if the, if the business thinks it’s, you’re gonna do 100 million in revenue, and you’re gonna hit 12 and a half million of EBITDA. You might go to the bank, and say we expect to produce 10. Like, there could be a scenario, especially if you had a couple of rough years, especially if you were just in special accounts. And you’ve had a rough period yet. Yeah, Mike, you could see the thing. But that’s more of maybe something the CFO manages with the banks, everyone else isn’t involved in that’s not a discussion, there’s one number within the company, we might just do some relationship management. We’re not saying not to do relationship management if you have to, to set an expectation. It’s just some companies will run two different budgets and have two different versions, which becomes confusing. And it’s like, Okay, what’s the goal that?

Brad Giles  14:16

Yeah, it’s like, it’s like having a car race, where you’ve got to finish lines. Yes, you don’t, you don’t watch the formula ones. And they say, Well, this is the finish line. But then there’s another finish line. It’s, it’s it doesn’t make any sense at all. We want to have one direction one goal. Because with when we’ve got two different goals, it can have such negative second order consequences, it can be really demotivating. For a players want to When they have that innate sense, they really they have a need to win. And we’ve got to align ourselves around that need and give them the real clear sense of winning, having a stretch target, it’s, it’s kind of like it’s a bit of a fake one, a bit of a fight, win, if we get to the original, the non stretch goal.

Kevin Lawrence  15:23

Right, because there was a better goal versus if you could achieve it and you got a second, there’s a lot of psychology. And so having two sets of books is confusing, as we’ve talked about. And it’s just, it’s, it could set up all kinds of weird psychology. So if you have to do some relationship management do, but for everyone in the company, we’re thinking about one goal, one number. The third thing is a Success builds confidence. And that’s the main thing. I mean, how do you get young kids comfortable doing things like riding a bike, right, you don’t take the kid when they’re learning how to ride the bike, take them up to the top of the hill and just let them go and see what happens. We know not to do that you do little things. First, you hold the seat and run behind them for all of us that have taught kids to ride a bike. And then you’ve got you know, sometimes they have bikes without training wheels, where they just use the legs. Or sometimes you have the old pedal bikes, and you’ve got training wheels, and then you gradually loosen the wheels, and then you lift their kid right up and down the curb. Like there’s a there’s like a 14 step process to getting a kid confident riding a bike. And then if something happens, and it doesn’t work, you kind of got to restart it. We know that and by the way, adults aren’t that different than kids. Right, except for the things you know, the riding the bike, we already have confidence, although a couple of good crashes might, might shake someone’s confidence a little bit. But the point of it is, is that that confidence and momentum you get from constantly achieving helps you a lot. And not achieving and constantly failing takes it the other way, and makes people doubt themselves makes people more unsure of themselves, which can often lead to lower performance.

Brad Giles  17:05

Success builds confidence. That’s the key point that you’re making, right? Because if we have said for the last, let’s say 10 quarters, that we’re going to achieve X and give or take, we’ve achieved X, we’ve got a great deal of confidence in ourselves to accurately set the next quarters goals, and that we can achieve those given all of the corporate memory that we’ve developed over time. Yeah.

Kevin Lawrence  17:38

So number four, is that actually failure is valuable, real failure, you know, real failure from a real solid goal. Because you know, once it’s cool, a solid goal that you aim for, and it can build motivation. It can build learning, it can build growth. But if you’ve got a whole bunch of different goals, and you’re not fully committed, or you’re not sure what you’re committed to, you often miss out on some of that failure that you get by having a solitary obsession.

Brad Giles  18:11

Fail. Yeah, you know, no one learns from success. People only legitimately Yes, yes, success is a lousy teacher. You know, it, I think we might have been Bill Gates that said that success is a lousy teacher, right? We will learn from failure. So we’ve got to embrace the learnings of the team that will come from failure and setting these kind of these, these bipolar goals, these stretch targets, where are we still winning? If we do 100, that we’re really winning? If we get to 125? Like, where is the failure in that? So knowing that we get the learning and the growth out of that is what really matters? Yep. Awesome. Moving on. The fifth one is, we might need more time to debate and land on a solid target. So it might take a little bit more time for us to be able to decide on what it is. And there might be a bit of risk in that. But the depth in planning that we get, like the value that the team gets from being able to set the goals and execute the goals and succeed. When we have one goal, it makes a huge difference to the team and their competence moving forward.

Kevin Lawrence  19:35

And if you look at just doing getting a budget, right, whether it’s a budget or goals, you know, either way, there’s a great exercise of risks and opportunities, based on the goal. Here’s a list of all the risks, risks, and how it will affect the project, whether it’s in terms of time or money. And here’s all the opportunities and all the things that could go our way and would benefit us in terms of time and money. And we’ve gone and done that in companies. It’s all a lot more work. But you then start to look at okay, well, if we’ve got 6 million of bottom line risk, and 6 million of opportunity, and we look at it and go, they’re all fairly, we could see how that solid list, you can almost say that you’re 12 and a half million dollar budget is realistic, right? Because you got six things, 6 million bucks that go the wrong way and 6 million to go the right way, we’ve probably got a good number, you ended up with 20 million that could go the right way. And 100 million could go the wrong way, which wouldn’t happen on that p&l, but 10 million to go the right way. And 2 million the Google the wrong way, you might pick a higher number, or you might feel very secure in it, the point of it is, is more deeper debate and getting a budget right is hard, really, really, really hard. And it takes time and maybe you need more time on whatever it happens to be. Even in our strategic planning sessions, we often don’t have enough time to debate these things. Often we’ll say okay, either people do prep in advance on a numbers and preparing them. Or maybe they need a week after to go in and crunch and get down to final numbers just so that we can lock down on it.

Brad Giles  21:11

This is what we’re going to do full stop. Like, that’s what we want. We want that confidence, because of the prep before and after, as you just like I’m doing both with teams. We want that confidence, this is what we’re going to do. And we become an execution machine. Like we just execute really, really well consistently, and build the confidence because like we alluded to this, and we said this before, one of the worst things, a quick story, I had a sales manager and the sales manager was in love with stretch targets, this sales manager would go out and would always set these outrageous sales targets, and over multiple years had never come anywhere close to any of them. And didn’t really even he would call it a stretch target and then didn’t have any, like normal target. And, and so he was wedded to it. He’s like it motivates the sales team. It gets him to work so much harder. And I said, Do you realize that your CEO has to stand up in front of the board every quarter and explain to the board? Why we didn’t hit the numbers and why they’re so far off? And what do you think that does to the confidence in them in the CEO? Like it’s eroding every single time?

Kevin Lawrence  22:38

Yep. Good. So finally, it just violates Collins’s 20 mile march, is it through his research and a book read by choice is about finding a minimum and maximum amount that you’re going to grow. So you have steady consistent growth of your company, and don’t have juvenile insanely explosive growth, followed by insanely implosive periods of time where things don’t go well. It’s just solid steady, and he found in his research, and during great companies had solid consistent growth, not doing too much, not doing too little. And so that, you know, what we’re talking about here is stretch targets violate the principle that Mr. Collins has figured out is the right way to build enduring great companies. And he seems to have done very well, with all of his principles hold up very, very well, in the clients. We work with. The bonus though, we got a little bonus one here, Brad. And that’s like, okay, okay, yes, I know, there, but for those of you that want to be able to stretch a little bit, there is something that we have seen work and we’re not, we’re not gonna argue against ourselves. We’re just gonna give you another little thought here, which is, you know, having a set goal and then saying that we’re going to go and push back it back past it to see what we could do. You can do that now. Got to be careful that could be you know, according to Collins is 20 mile Marsh, there could be some danger now, but we’re human. You don’t have to, you know, we these things are principles. But one thing you can do is to sort of say, Okay, we’re gonna hit our 12 and a half million profit target. And we’re gonna continue to push, right? It’s still 12 and a half. You don’t say, Well, we could do 12 and a half, we could do 15. And you could there are some frameworks for that. But it’s like we’re aiming for 12 and a half. You might have in your mind, I think we can exceed it team let’s try and push past it. But that way, when you get 12 and a half, you’re still happy. And there is a a model we use sometimes that allows us to set an over Achievement Goal, but the goal is still the goal ie 12 and a half as a goal we know we can achieve our risks and opportunities have confirmed that we can and you know we might do something awesome if we get to 13 million or 14 million, or whatever it happens to be, but it’s no matter what the 12 and a half is a solid goal that we know we can achieve and it’s healthy for the business, we just leave room to do more, then what happens next quarter.

Brad Giles  25:11

So we get to the next quarter, and it’s time to set the goals. Like we have to budget if we’re able to, if we’re able to achieve more like we want confidence in what we can do. So I’m not saying in your example, it should be 14 million. But we recalibrate and we reach every quarter and we recalibrate and we recalibrate. We don’t push the team to breaking by any means. We want to have achievable ambitious goals that we’re confident in.

Kevin Lawrence  25:47

It’s great to overachieve. Sometimes you just got to be careful that you don’t want to get too greedy and make a bigger mess of it. Awesome. So there are let’s quickly do a review of the seven, I’ll do the first three, they’re brand new to the Final Four, man whose job is to accurately predict performance, not too low, not too high, but trying to hit the numbers you would you want to achieve or you commit to doing. And it’s still being ambitious, but it’s ambitious, knowing that you can win and not overstretching it to things just to think it’s gonna motivate people. Secondly, having two sets of books, meaning two different numbers, you’re aiming for a conservative target, and then their aggressive target, it gets confusing to people try and pick one, you know, the f1 race doesn’t have to finish lines. And Success builds confidence. It’s continually achieving, I mean, helps to build momentum and confidence and strength and aligns teams and a great, great things come when people are confident and believe they can do things.

Brad Giles  26:51

Number three, number four part of a real failure. So failure matters. People don’t learn from success, people learn from failure. So it’s okay if the team fails, provided that they learn. And when you’ve got ambiguous targets, people aren’t really failing, and they aren’t really learning. The next one, we need to spend more time when we have only one target. But that’s okay. Because it helps the team to be come better at executing. And then number six, it violate it violates Jim Collins 20 mile march rule, which is about consistency, we’re not going to do 20 miles one day, and then 35 the next when the conditions are better. We’re going to do 20 miles and we’re going to be consistent about that. So that covers why stretch targets are garbage. And, yeah, maybe you’ve got a different perspective. But our experience, I guess unanimously landed us on, let’s be confident in what we’re trying to achieve. Thank you, Kevin. It’s been a pleasure today. And if you’d like to see the YouTube video, you can go to youtube.com Search for the Growth Whisperers as you can find Kevin at Lawrence and co.com and you can find myself Brad at evolution partners.com.au I hope you’ve enjoyed the episode. Look forward to chatting to you again next week.