I like to set Threshold (i.e., the minimum level of performance below which there is not payout) so that there is 1 in 5 (20%) 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. On the other hand, if Thresholds are too difficult to achieve, too many people will fail to reach them and the incentive plan will be perceived as unrealistic resulting in many participants not even trying.
I like to set Targets (i.e., the desired or expected level of performance) so that incentive plan participants have a slightly better than 50/50 chance of hitting them. Am I a “softy?” Maybe, but I prefer to look at it this way – Success breeds success. And I would much rather have people hitting targets more often than not for the confidence that provides. 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 greater than that of the employee. That way, I can always be sure that the Company is better off having the results than not having them. Yes, you might add, but what if the company would have had 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.
As for Outstanding, that should be a real stretch. I like 10% because that suggests that one year in 10 someone could reach or exceed them. Said another way, if 10 people are given the same goal one might reach the Outstanding level of achievement. Going beyond Outstanding can be a very good thing for both the employee and the company (provided the goals are set right). 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 be imagining it might happen to them. And good things happen when people dream!
In summary, when goals are calibrated correctly, in any given year (or on any given measure), you would have 80% of employees "in the money" by being above Threshold (20% would be below Threshold and earn no payout), 50% to 60% at or above Target, and 10% at or above Outstanding.
Establishing the right probabilities of achievement when setting goals is something of an art form and it can take a few years to get it right. If you keep the probabilities mentioned above in mind and check actual results against them each year, you can fine tune your performance predictions until you reach the right overall levels of achievement.
Check out Incentive Plan Builder for more information on goal setting.