Businesses require motivated and productive employees. Monetary incentives, such as pay-for-performance schemes are a popular tool to encourage better employee performance. Another effective and much cheaper tool that has proved to lift employee performance is smart goal setting.
Whether assigned by management or self-chosen, goals are powerful motivators for workers, with the potential for boosting productivity in an organization. They work both with and without monetary incentives. However, if not chosen carefully or if used in unsuitable situations, goals can have undesired and harmful consequences, as Sebastian J. Goerg explains in a new IZA World of Labor article.
The economics of goal setting
Goals are everywhere in human life and organizations. In our private life we set goals for saving money and losing weight. At work, we may face sales goals, project milestones and production goals. Psychological research on goal setting has consistently shown that goals affect our behavior and that, if chosen wisely, goals can boost individual productivity.
More recently, economists have jumped on the goals bandwagon, adding formal theories to model the functioning of goals and bringing goals more in the focus of business managers. In particular, large technology firms such as Google, Intel, and Twitter have started to use goal-setting approaches to provide real-time feedback to their workers.
Economists agree that the two main drivers of employee motivation are their wages and the ambition to reach personal goals. Consequently, goals provide a reference point against which workers can compare their performances. Consequently, not reaching a personal goal reduces a workers satisfaction and utility.
Field experiment shows the effectiveness of goals
To prove the effectiveness of goals, Sebastian J. Goerg (Florida State University) and Sebastian Kube (University of Bonn) conducted a field experiment on goal setting in the library of the Max Planck Institute in Bonn. During the experiment roughly 35,000 books had to be found and moved from one shelf to another. Temporary workers hired for this one-time-only job did not know that they were part of an experiment.
The study revealed that workers who were assigned specific goals for the number of books to be located and re-shelved during a shift were 15% more productive than workers without goals. This experiment confirmed what many other studies on performance goals have documented: Specific and challenging goals lead to better performance than easy goals or do-your-best rules. Goals boost performance by motivating increased effort, a stronger focus on the task, and a reduction in on-the-job leisure.
Combining goals with monetary incentives
The library field experiment also investigated whether the impact varied, once goals were combined with monetary incentives. In one case, workers with self-chosen goals received the same piece-rate pay as in the baseline experiment while goals were chosen independently from this payment scheme. In another case, self-chosen goals had monetary consequences: workers received a bonus only if they reached their goal.
In both experiments with goals, whether workers were paid more for reaching their goals or not, workers were faster right from the start and needed significantly less time to find a book than those without goals. Thus this field experiment confirmed: Even when monetary incentives are already high, complementing those incentives with goal setting can improve performance.
Beware of negative side effects
But the goal-setting tool should be applied with caution. Setting the wrong goals can narrow one’s focus too much, thereby losing sight of other work aspects. Goals can also reduce cooperation in the workplace, increase risk taking and encourage unethical behavior. Nearly all studies on the negative side effects of setting goals have observed improved performance on the main task, but at the cost of adverse behavior in other dimensions.
One possible way to avoid adverse behavior is to include strong monitoring along with goal setting. However, workers could interpret increased monitoring as a sign of distrust and reciprocate by reducing their effort. So while monitoring might reduce the negative effects of goal setting, it might also reduce workers’ motivation and thereby the positive effects of goal setting.
Complex work environments call for SMART goals
Goal setting becomes especially tricky in complex working situations. In simple work environments, where output is determined by a single measurable input and where chances for adverse behavior are low, goals are both easy and effective. In more complex environments, goals need to be tailored to the specific situation. They should be specific, measurable, attainable, relevant, and timed (SMART).
- Specific means a well-defined goal in an explicitly established unit of measurement (such as euros for revenue, pieces for output, and pounds for weight loss) as opposed to a simple “do your best” rule.
- Measurable refers to the ability to observe progress so that an individual (and observer) knows how close goal attainment is.
- A goal should be attainable, which means that an individual has a realistic chance of achieving the goal.
- To be relevant, a goal needs to be meaningful and worth achieving for the individual or the organization.
- And finally, timed implies that there should be some time limit for reaching the goal (for example, lose five pounds by the end of the month, or increase revenue by €100,000 in the first quarter of the year).
SMART goals should be embedded in broader organizational objectives that are communicated to workers. Clear communication between management and employees might help to calibrate goals so that they do not become too challenging and do not narrow the focus of attention too much. If managers take these aspects into account, goals can be a powerful tool to improve both productivity and employee satisfaction.