I like to set Targets so that incentive plan participants have a slightly better than 50/50 chance of hitting them. I may be a softy, but I prefer to look at it this way; Success breeds success. I would rather people develop confidence by achieving their Targets, than have them constantly falling short, getting demoralized, and giving up.
Yes, you may say, but aren’t you giving away money? No, because I always make sure that the company’s return on performance is substantially greater than that of the employee. That way, I can always be certain that the company is better off having the results than not having them. Yes, you might add, but what if the company would have gotten the results anyway? To this I would answer, you might get away with that for a while, but eventually employees are going to feel used and undervalued and either leave, or worse yet, their body will keep coming to work but they’ll leave their brain at home.
Set Targets so that employees have an approximately 60% chance of achieving them in any given year. In other words, when Targets are set properly, they will be met 3 out of every 5 years, or 3 out of 5 competent performers, given the same Target in the same year, should meet or exceed that Target. 60% (3:5)
Thresholds are a different story. There should be a 1 in 5 chance they WON’T be met. This is important. Thresholds should never be set so low that they are virtually guaranteed. When that happens, the company very well might be making payments and getting nothing of value for them.
Therefore, I recommend setting Thresholds so that employees have an approximately 80% chance of achieving them in any given year. In other words, when Thresholds are set properly, they will be met 4 out of every 5 years, or 4 out of every 5 people given the same Threshold in the same year should meet or exceed that Threshold. 80% (4:5) If setting Thresholds this low concerns you, feel free to adjust payouts so that very little money is earned when Thresholds are achieved.
As for Outstanding, that should be a real stretch. I like a 20% probability of achievement because it suggests that two years in 10 someone will meet or exceed them. Going beyond Outstanding can be a very good thing for both the employee and the company (provided the goals are set properly). This is the stuff myths are made of.
When someone goes beyond Outstanding, the word gets out, and if you play your cards right, everyone will imagine it happening to them. And good things happen when people dream!
Set the Outstanding level of achievement so that employees have a 20% chance of achieving it in any given year. In other words, when Outstanding is set properly, employees will meet or exceed this level only 1 year out of every 5, or 1 out of every 5 employees given the same Outstanding level in the same year should meet or exceed that level. 20% (1:5)
SYMMETRY & SPACING
Although most goals are symmetrical around the Target (i.e., the distance from Threshold to Target is the same as the distance from Target to Outstanding) this need not always be so. Goals can be asymmetrical if you wish. However, it is important to ensure that there is sufficient spacing between performance levels so that a small change in performance does not propel the employee from Threshold to Outstanding too rapidly.