Article originally published in the American City Business Journals on December 4, 2018
One of the most important decisions of any leader is to set annual financial goals for their organization.
Should they set realistic goals, or tough stretch goals with a lower probability of achievement?
At the recent Disruptor 50 conference in Philadelphia, Shark Tank star Kevin O’Leary discussed the factors that influenced the return of capital of the 37 companies within in his venture portfolio. O’Leary said, “A study that showed … 90 percent of the [cash] returns came from companies run by women.” Why?
“Companies run by men hit their quarterly sales targets 65 percent of the time. … Women-led companies hit their targets 95 percent of the time. … If you are on a winning team in any sport, … you have a winning culture. Winning cultures have different metrics than just financial reward. Being part of a winning team is powerful. These [women-led] teams are constantly hitting their targets.”
O’Leary talks about his views in a March 2018 CNBC article headlined, “Shark Tank star Kevin O’Leary: Women-run businesses make me the most money — here’s why.”
In this article, O’Leary says, “If employees aren’t meeting their goals, that frustration can lead to turnover, which is particularly costly for small operations. Women are better at avoiding this pitfall.
“When you meet your goals 95 percent of the time, you change the culture of your business. People feel they’re working in a winning organization,” O’Leary says. “That’s why women are doing better in business — they keep their people. The staff are sticky. They want to work there because they’re hitting their goals. … You don’t have to reach for the stars, you want to win 95 percent of the time. That’s the secret sauce.”
In January 2015, I wrote an article on this subject headlined, “Setting credible and realistic goals can drive your financial performance.”
As a mid-level leader at my company, I lived through many years of CEOs setting what nearly every direct report felt was an unrealistically high annual corporate earnings goal that lacked strategies for achievement. As we started to lag behind the goal, costs were cut in a losing effort to try to close the performance gap between the actual result and the goal.
This was a debilitating exercise that took its toll on morale. Who were we kidding?
One of the keys to setting a goal is to ensure that upside potentials are properly balanced by down-side risks. We found that people are optimistic and often overstate upside potentials and understate downside risks. This contributes to missing the goal.
When I was named CEO of the company, we changed the paradigm of setting unrealistic goals. We set business unit and corporate earnings goals with a more realistic chance of achieving them. We were much more realistic in balancing the upside potential with the downside risk of possible adverse market events. The objective for everyone was not only to achieve our business unit and corporate earnings goals, but to blow through them to the greatest degree possible and have fun doing it.
The morale changed significantly within the company. Instead of a debilitating atmosphere in which we lagged our earnings goal during the year, employees took pleasure in tracking above goal each month and quarter.
I didn’t use O’Leary’s phrases “winning team” and “winning culture” to describe what we created, but thinking back, those are the phrases to describe the change in the organization at that time.
Our employee incentive program was not driven by achieving the earnings goal, but against achieving earnings growth as a calculated percentage above the three previous years’ earnings results, based upon what was appropriate for our industry. The higher the actual earnings achieved, the higher the bonuses and profit-sharing pool in which all employees participated.
With this approach, our earnings more than doubled from 1999 through 2004, a period that included 9/11 and the recession of 2002. This compared with flat earnings during the previous three years. We out-performed our peer group of 17 companies during this five-year period, and moved solidly into first quartile performance.
As the leader of your organization, consider how you set the annual earnings goal for your company. The stockholders don’t even know what the earnings goal for the company is and don’t care – they only care about year-over-year earnings growth. Reward your people for maximizing year-over-year earnings growth in an upbeat culture, and reward them handsomely for doing so.
Stan Silverman is founder and CEO of Silverman Leadership. He is a speaker, advisor and nationally syndicated writer on leadership, entrepreneurship and corporate governance. Silverman earned a Bachelor of Science degree in chemical engineering and an MBA degree from Drexel University. He is also an alumnus of the Advanced Management Program at the Harvard Business School. He can be reached at Stan@SilvermanLeadership.com.