Establishing Challenging Goals

The first element of goal setting concerns establishing goals that are perceived as chal - lenging
but realistic and to which there is a high level of commitment. This can be ac complished by
varying the goal difficulty and the level of employee participation in
the goal-setting process. Increasing the difficulty of employee goals, also known as
"stretch goals," can increase their perceived challenge and enhance the amount of effort expended to achieve them.' Thus, more difficult goals tend to lead to increased
effort and performance, as long as they are seen as feasible. If goals arc set too high,
however, they may lose their motivating potential and employees will give up when
they fail to achieve them. An important method for increasing the acceptance of a
challenging goal is to collect benchmarks or best-practice referents. When employees
see that other people, groups, or organizations have achieved a specified level of performance, they are more motivated to achieve that level themselves.
Another aspect of establishing challenging goals is to vary the amount of partici pation in the goal-setting process. Having employees participate can increase moti vation and performance, but only to the extent that members set higher goals than
those typically assigned to them. Participation also can convince employees that the
goals are achievable and can increase their commitment to achieving them.
All three contextual factors play an important role in establishing challenging
goals. First, there must be a clear line of sight" between the business strategy goals
and the goals established for individuals or groups. This is a key strength of the bal anced scorecard approach to goal setting. When the group is trying to achieve goals
that are not aligned with the business strategy, performance can suffer and organi zation members can become frustrated. Second, employee participation in goal set ting is more likely to be effective if emplo yee involvement policies in the
organization support it. Under such conditions, participation in goal setting is likely
to be seen as legitimate, resulting in the desired commitment to challenging goals.
Third, when tasks are highly interdependent and work is designed for groups,
group-oriented participative goal setting tends to increase
commitment. C larifying Goal Measurement
The second element in the goal-setting process involves specifying and clarifying the
goals. When given specific goals, workers perform higher than when they are sim ply told to "do their best" or when they receive no guidance at all. Specific goals re duce ambiguity about expectations and focus the search for appropriate behaviors.
To clarify goal measurement, objectives should be operationally defined. For ex ample, a group of employees may agree to increase productivity by 5 %a challeng ing and specific goal. But there are a variety of ways to measure productivity, and it
is important to define the goal operationally to be sure that the measure can be in fluenced by employee or group behaviors. For example, a productivity goal defined
by sales per employee may be inappropriate for a manufacturing group.
Clarifying goal measurement also requires that employees and supervisors nego tiate the resources necessary to achieve the goalsfor example, time, equipment,
raw materials, and access to information. If employees cannot have appropriate resources, the targeted goal may have to be revised.
C on tex tua l fa cto rs al so play an imp o rtan t ro l e in the c la ri f yi ng pr oc e ss . Goa l

s p e c if ic at i o n a n d c l a r i t y c an b e di ffi c u lt i n hi g h -t e ch n ol o g y s et ti n g s w h e re t h e
work often is uncertain and highl y interdependent. Increasing emplo yee partici pation in clarifying goal measurement can give employees ownership of a non spe cific but challenging goal. Employee involvement policies also can impact the way
goals are clarified. The entire goal-setting process can be managed by employees
a n d w o r k t e a m s w h en e m p l o ye e i n vo l ve m e n t p o l i c i e s a n d w o r k d e s i g n s f a v o r i t.
Finally, theprocess of specifying and clarifying goals is extremely difficult if the

business strategy is unclear. Under such conditions, attempting to gain consensus

on the measurement and importance of goals can lead to frustration and resis tance to change.
Application Stages
Based on these features of the goal-setting process, OD practitioners have devel'oped
specific approaches to goal setting. The following steps characterize those applications:

1.

Diagnosis. The fir st step is a thorough diagnosis of the job or work group. of
employee needs, and of the three context factors, business strategy, workplace
t e c h n o l o g y, and level of employee involvement. This provides information
about the nature and difficulty of specific goals, the appropriate types and lev els, of participation, and the necessary support systems.

2.

Pr e pa r a t ion for G oa l Se ttin g. This step prepares m an ag er s and em pl o yee s to

engage in goal setting, typically by increasing interaction and communication
between managers and employees, and offering formal tr aining in goal-setting
methods. Specific action plans for implementing the program also are made at
this time.

1.

Setting of Goals. In this step challenging goals are established and methods for
goal measurement are clarified. Employees participate in the process to the ex tent that contextual factors support such involvement and to the extent that
they are likely to set higher goals than those assigned by management.

1.

Review. At this final step the goal-setting process is assessed so that modifica tions can be made, if necessary. The goal attributes are evaluated to see whether
the goals are energizing and challenging and whether they support the business
strategy and can he influenced by the employees.
Management by Objectives
A common form of goal setting used in organizations is management by objectives
(HBO). This method is chiefly an attempt to align personal goals with business
strategy by increasing communications and shared perceptions between the man ager and subordinates, either individually or as a group, and by reconciling conflict
where it exists. All organizations have goals and objectives; all managers have goals and objectives.
In many instances, however, those goals are not stated clearly, and managers and sub ordinates have misunderstandings about what those objectives are. 11,4130 is an approach to resolving these differences in perceptions and goals.. MBO is characterized
by systematic and periodic managersubordinate meetings designed to accomplish organizational goals by joint planning of the work, periodic reviewing of accomplish ments, and mutual solving of problems that arise in the course of getting the job done.
MB0 has its origin in two different backgrounds: organizational and develop mental. Th e organizational root of MBO w as developed b y Drucker. who e mpha s i z e d that organizations need to establish objectives in eight key areas: "market
standing; innovation; productivity; physical and financial resources; profitability;
manager performance and development; worker performance and attitude; and
public responsibility: 41 Drucker's work was expanded by Odiorne, whose first book
on MBO stressed the need for quantitative measurement.' 2
Acco rding to Levinson," MB `s second root is found in the work of McGregor,
who stressed the qualitative nature of MB and its use for development and growth
on the job.' 4 McGregor attempted to shift emphasis from identifying weaknesses to
analyzing performance in order to define strengths and potentials. He believed that
this shift could be accomplished by having subordinates reach agreement with their
bosses on inajor job responsibilities; then, individuals could develop short-term n perfr m a nc e go al s an d act io n p l ans f or ach ie vi n g th o se g o als, th us al low in g t hem to
appraise their own performance. Subordinates then would discuss the results of this
self-appraisal with their supervisors and develop a new set of performance goals and
p lan s. T h is emp hasi s on mut ual un d erstan di n g an d p erfo rmance rath er th an p er so na l i t y w o ul d sh i f t th e su p e r vi so r' s r ol e fr o m j ud g e t o h e l p er, t h e re b y r ed u c i n g
both role conflict and ambiguit y. The second root of M B O r e d u c e s role a m b i g u i t y
b y m a k i n g g o a l s e t t i n g more participative and transactional, by increasing commu nication between role incumbents, and b y ensuring that both indi vidual and organizational goals are identified and achieved.
An M BO p rogram of ten g o e s b e yon d t he o ne- on -o n e, man ager- sub o rdin ate re l a t i o n s h i p t o f o c u s o n p r o b l e m - s o l vi n g d i s c u s s i o n s i n vo l vi n g w o r k t e a m s a s w e l l .
Setting goals and reviewing individual performance are considered within the larger
context of the job. In addition to organizational goals, the MBO process gives atten tion to indi viduals' personal and career goals and tries to make those and the orga
n i z a t i o n a l g o a l s m o r e c o m p l e m e n t a r y. T h e t a r g e t - s e t t i n g p r o c e d u r e a l l o w s r e a l
(rather than simulated) subordinate participation in goal setting, with open,
p r o b l e m - c e n t e r e d discussions among team members, supervisors, and subordinates.
There are six basic steps in implementing an MBO process,"
1. Work group involvement. In the first step of NIBO, the members of the pri mary work group define overall group and individual goals and establish action
pl an s fo r achi evin g t hem. I f th is step i s omitted or i f organization al goals an d
strategies are unclear, the effectiveness of an .MBO approach may be greatly re duced over time.

2.
3.

Joint manager-subordinate goal setting. Once the work group's overall goals
and responsibilities have been determined, attention is given to the job duties and
responsibilities of the individual role incumbents. Roles are carefully examined in
light of their interdependence with the roles of others outside the work group.
Establishment of action plans for goals. The subordinate develops action
plans for goal accomplishment, either in a group meeting or in a meeting w ith
the immediate manager. The action plans reflect the individual style of the sub ordinate, not that of the supervisor.

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3.

Establishment of criteria, or yardsticks, of success. At this point, the manager and subordinate agree on the success criteria for the goals that have been
established criteria that are n o t limited to easil y measurable or quantifiable
data. A more important reason for jointly developing the success criteria is to
ensure that the manager and subordinate have a common understanding of the
task and what is expected of the subordinate. Frequently, the parties involved
discover that they have not reached a mutual understanding. The subordinate
and the manager may have agreed on a certain task, but in discussing how to
me as u r e i t s s uc ce ss , t he y fi n d th a t th e y h a ve n o t b ee n co mm un i c at i n g cl ea rl y.
Arriving at joint understanding and agreement on success criteria is the most
important step in the entire MBO process.

4.

Review and recycle. Periodically, the manager reviews work progress, either
in the larger group or with the subordinate. There are three stages in this review
process. First, the subordinate takes the lead, review ing progress and discussing
a c h i e ve m e n ts a n d t h e o b s t a c l e s f a c e d . N e x t , t h e m a n a g e r d i s c u s s e s w o r k p l a n s
and objectives for the future. Last, after the action plans have been made, a
more general discussion covers the subordinate's future ambitions and other
fa ct or s o f co n c er n . I n t h i s f i n al p h a se , a g re at d ea l o f co ac h i ng a n d c o u ns el i n g
usually takes place.

6. Ma in te n a n c e o f r e co rd s . I n m a n y N I B O p ro g ra m s , t h e w o r k i n g d o c u m e n t s of
the goals, criteria, yardsticks, priorities, and due dates are forwarded to a third
party. Although the evidence is indirect, it is likely that the MBO program, as
an OD effort, suffers when the working papers are reviewed regularly by a third
party, such as higher management or the personnel department. Experience
s h ow s t h a t w h e n t h e w o r k i n g p a p e r s r o u t in e l y a r e p a s s e d o n t h e y a r e l e s s
likely to reflect open, honest communication within the supervisorsubordinate
pair or the work group. Often they represent instead an effort to impress the
third party or to comply with institutionalized rules and procedures.
Ap p li ca tio n 1 7. 1 d esc ri b es h ow a pe rfo rm a nc e man ag em en t p ro ce ss w as d e signed at Monsanto Company. It shows how goal-setting processes can be linked
with business strategies and performance appraisal processes."
Effects of Goal Setting and MBO
The impact of goal setting has been researched extensively and shown to be a par ticularly effective OD intervention. The research results on MBO generally are posi tive but less consistent than are the findings on goal setting.
Goal setting appears to produce positive results over a wide range of jobs and or ganizations. It has been tested on data-entry operators, logging crews, clerical work ers, engineers, and !ruck drivers, and it has produced performance improvements
of between 11% and 27%. 17 Moreover, four meta-analyses of the extensive empirical evidence supporting goal setting concluded that the proposed effects of goal dif ficulty, goal specificity, and participation in goal setting generally are substantiated
across studies and with both groups and individuals." Longitudinal analyses sup port the conclusion that the gains in performance are not short-lived,' 9 A field study
of the goal-setting process, however, failed to replicate the typical positive linear re lationship between goal difficulty and performance, raising some concern about the
generalizability of the method from the laboratory to practice.' Additional research
has attempted to identify potential factors moderating the results of goal setting, incl udi ng tas k unc e rta in t y, am oun t a nd qu ali t y of pla nn ing , p er sona l n eed fo r
achievement, education, past goal successes, and supervisory style. 21 Some support
for the moderators has been tourid. For example, when the technical context is un certain, goals tend to be less specific and people need to engage in more search be havior to establish meaningful goals.
The existing research on MBO effectiveness is large but mixed, 22 However, it suggests that a properly designed MBO program can have positive organizational re sults. Carroll and Tosi conducted a long -term study of an MI30 program at Black &
Decker,23 first evaluating the program and then using those data to help the com pany revise and improve it. This resulted in greater use of and satisfaction with the
program. The researchers concluded that top-management support of MBO is the
most important factor in implementing such programs. Many programs are shortlived, however, and wither on the vine because they have been installed without
adequate diagnosis of the context factors. In particular, MBO can focus too much on
vertical alignment of individual and organizational goals and not enough on he
rowed issues that exist when tasks or groups are interdependent.
PERFORMANCE APPRAISAL
Performance appraisal is a feedback system that involves the direct evaluation of individual or work group performance by a supervisor, manager. or peers. Most organizations have some kind of evaluation system that is used for performance feedback,
p a y
a d m i n i s t r a t i o n ,
a n d ,
i n
s o m e

c a s e s

counseling and developing employees.

Thus, performance appraisal represents an important link between goal-setting
processes and reward systems. One recent survey of over 300 North American companies, for example, found that 65% reported a link between performance ratings
and rewards, 46% used the system equally for performance development and deci sion making, and 53% of the organizations believed the system was aligned with
organizational values and priorities. 25
Ab u n dan t e vi d ence, how ever, i n di cates th at o rgan i zati o ns d o a po o r j o b ap p r ai si n g e mp l o ye es . 26 As o ne s t u d y p u t it , ' ' Th e ap pr ai sa l o f pe rf o r ma nc e a p praisals is not good.. .. In fact, our review indicates that, regardless of a program's
stat ed p urp ose, few stu di es show p o sit i ve eff ects. " 27 An ot her stu d y f ou n d th at
only 55% believed the appraisal process adequately distinguished between poor,
average, and good performers. 28 Consequently, a growing number of firms have

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"

t_

s o u g h t w a ys t o i m p r o v e p e r f o r m a n c e a p p r a i s a l . S o m e i n n o v a t i o n s h a v e b e e n
m a d e i n e n h a n c i n g e m p l o ye e i n v o l v e m e n t , b a l a n c i n g o r g a n i z a t i o n a l a n d e m pl o yee n eeds, and i ncreasin g the n umber of raters. 29 These n ew er fo rms of ap praisal are being used in such organizations as AT&T, Raychem, Levi Strauss, Intel,
and Monsanto.
The Performance Appraisal Process
Table 17.1 summarizes several common elements of performance appraisal sys tems. 3 F or each element, tw o con trasti ng featu res are p resent ed, rep resentin g
traditional bureaucratic approaches and newer, high-involvement approaches. Per formance appraisals are conducted for a variety of purposes, including affirmative
action, pay and promotion decisions, and human resources planning and develop ment, Because each purpose defines what performances are relevant and how they
should be measured, separate appraisal systems are often used. For example, ap praisal methods for pay purposes are often different from systems that assess employee development or promotability. Employees also have a variety of reasons for
wanting appraisal, such as receiving feedback for career decisions, getting a raise,
and being promoted_ Rather than trying to meet these multiple purposes with a few
standard appraisal systems, the new appraisal approaches are more tailored to balance the multiple organizational and employee needs. This is accomplished by ac tively involving the appraisee, co-workers, and managers in assessing the purposes

of the appraisal at the time it takes place and adjusting the process to fit that pur pose. Thus, at one time the appraisal process might focus on pay decisions, another
time on employee development, and still another time on employee promotability.
Activel y involving all relevant participants can increase the chances that the pur pose of the appraisal will be correctly identified and understood and that the appro priate appraisal methods will be applied.
The new methods tend to expand the appraiser role beyond managers to include
multiple raters, such as the appraisee, peers or co-workers, and direct reports and
others having direct exposure to the manager's or employee's performance. Al so
known as 360-degree feedback. this broader approach is used more for member devel o p m e n t t h a n f o r c o m p e n s a t i o n p u r p o s e s . 3 ' Th i s w i d e r i n v o l v e m e n t p r o v i d e s a
number of differen t view s of the appr ais ee' s performance. I t c an l ead to a mo re
comprehensi ve assessment of the emplo yee's performanc e and c an incre ase the
likelihood that both organizational and personal needs will be taken into account.
The key task is to form an overarching view of the employee's performance that in corporates all of the different appraisals. Thus, the process of working out differ ences and arriving at an overall assessment is an important aspect of the appraisal
process. This improves the appraisaiss acceptance, the accuracy of the information,
and its focus on activities that are critical to the business strategy.
The newer methods also expand the role of the appraisee. Traditionally, the em ployee is simply a receiver of feedback. The supervisot unilaterally completes a form
concerning performance on predetermined dimensions, usually personality traits,
such as initiative or concern for quality, and presents its contents to the appraisee.

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Th e n ewe r appro ach es acti vel y invol ve apprai see s in all phase s of the app rai sal
process, The appraisee joins with superiors and staff personnel in gathering data on
performance and identifying training needs. This active involvement increases the
likelihood that the content of the performance appraisal will include the employee's
views, needs, and criteria, along with those of the organization. This newer role for
employees increases their acceptance and understanding of the feedback process.
Performance measurement is typically the source of many problems in appraisal
because it is seen as subjective. Traditionally, performance evaluation focused on
the consistent use of prespedfied traits or behaviors. To improve consistency and va lidity of measurement, considerable training is used to help raters (supervisors)
make valid assessments. This concern for validity stems largely from legal tests of
performance appraisal systems and leads organizations to develop measurement app ro a ch es , su ch as th e b eh av io ra ll y an ch o red r a tin g s cal e (BARS) and its variants. In
newer approaches, validity is not only a legal or methodological issue but a social
issu e a s w ell; all app ro pr iate partic ipants ar e in vo l ved in n ego tiating acceptable
ways of measuring and assessing performance. Increased participation in goal set ting is a part of this new approach. All participants are trained in methods of mea s u r i n g a n d a s s e s s i n g p e r f o r m a n c e . B e c a u s e i t f o c u s e s o n b o t h o b ject i ve a n d
subjective measures of performance, the appraisal process is more understood, ac cepted, and accurate.
The timing of performance appraisals traditionally is fixed by managers or staff
personnel and i s ba sed on ad mi ni str ati ve c ri teri a, su ch a s ye a rl y p a y d eci si on s.
Newer approaches increase the frequency of feedback. In 1997, 78% of appraisals
were performed annually; in 2003, over 40% of companies surveyed conducted ap praisals two times per year. 32 Although it may not be practical to increase the number of formal appraisals, the frequency of informal feedback can increase, especially
when s trategic objectives change or when the tech nolog y is highl y unce rtain. In
those situations, frequent performance feedback is necessary for appropriate adaptations in work behavior. The newer approaches to appraisal increase the timeliness
of feedback and give employees more control over their work.

Application Stages
The process of designing and implementing a performance appraisal system has re ceived increasing attention. 00 practitioners have recommended the following six
steps:"

1.

Select the Right People. For political and legal reasons, the design process needs
to include human resources staff, legal representatives, senior management,
and system users. Failure to recognize performance appraisal as part of a com plex performance management system is the single most important reason for
design problems. Members representing a variety of functions need to he in volved in the design process so that the essential strategic and organizational issues are addressed.

2.

D i a g n o s e t h e C u r r e n t S i t u a t i o n . A cl ea r p i c tu re o f th e cu rr en t ap p r ai sa l
process is essential to designing a new one. Diagnosis invol ves assessing the
contextual factors (business strategy, workplace technology, and employee in volvement), current appraisal practices and satisfaction with them, work design,
and the current goal-setting and reward system practices. This information is
used to define the current system's strengths and weaknesses.

3.

Es t a bl i s h t h e S ys te m ' s P u rp o s es an d O b j ec ti ve s. The ultimate purpose of an

appraisal system is to help the organization achieve better performance. Man agers, staff, and emplo yees can have more specific vi ew s about how the ap praisal process can be used. Potential purposes can include serving as a basis for
rewards, career planning, human resources planning, and performance im provement or simply giving performance feedback.

4.

Design the Performance Appraisal System. Given the agreed-upon purposes of the system and the contextual
factors, the appropriate elements of an appraisal
system can be established. These should include choices about who performs
the appraisal, who is involved in determining performance, how performance is
measured, and how often feedback is given. Criteria for designing an effective
performance appraisal system include timeliness, accuracy, acceptance, under standing, focus on critical control points, and economic feasibility.
First, the timeliness criterion, recognizes the thric value of information. individuals and work groups need to get performance information before evalua tion or review. When the information precedes performance evaluation, it can
be used to engage in problem-solving behavior that improves performance and
satisfaction. Second, the information contained in performance feedback needs
to be accurate. Inaccurate data prevent employees from determining whether
their performance is above or below the goal targets and discourage problemsolving behavior. Third, the performance feedback must be accepted and owned
by the people who use it Participation in the goal-setting process can help to
ensure this commitment to the performance appraisal system. Fourth, informa tion contained in the appraisal s y s t e m n e e d s t o b e understood if it is to have
problem-solving value. Many organizations use training to help employees un derstand the operating, financial, and human resources data that will be fed
b a ck to t he m. F i f th , ap p r ai sa l i n fo rm at io n s ho u l d fo cu s on c ri ti ca l c o n tr o l
points. The information received by employees must be aligned with important
elements of the business strategy, employee performance and reward system.
For example, if the business strategy requires cost reduction but workers are
measured and rewarded on the basis of quality, the performance management
system may produce the wrong kinds of behavior. Finally, the economic feasi bility criterion suggests that an appraisal system should meet a simple cost
benefit test. If the costs associated with collecting and feeding back performance

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