Article originally published in the American City Business Journals on July 9, 2019
Setting an organization’s annual financial goals has importance beyond financial considerations. If the probability of achieving the financial goals is low and in most years the goals are not achieved, employee morale suffers and the ongoing funding of growth initiatives critical to the long-term success of the company is jeopardized.
I have written articles on this subject, in January 2015 and in December 2018. This article shares some additional perspectives on the goal-setting process.
Setting goals at PQ Corporation as a business unit leader, then as the company’s CEO and later as a board member of other companies approving the financial goals of their CEOs, I have developed a perspective on the annual goal-setting process. Done effectively, goal setting drives execution and individual, team and organizational performance.
As a business unit leader, I worked for CEOs who set stretch financial goals for the company. Upside potentials were not balanced against downside risks. These CEOs believed that actual performance with stretch goals would exceed the performance that would have been attained, had the goals been set more realistically.
However, since there was a relatively low probability of achievement, many employees did not take ownership in these goals, and most years the company fell short of achieving them. The board of directors held management accountable for achieving what they said they would achieve, and when performance fell short, the board was not happy.
After I was named CEO of PQ, I changed our annual financial goal-setting approach. Each business unit set goals that were reasonably attainable, based on strategies that provided a path toward achievement. However, I set the expectation that the financial goals should be exceeded by the greatest extent possible, and our employees should have fun doing so.
The higher the financial performance, the higher the bonus payment for that portion of the bonus tied to financial results. We were completely transparent by sharing with the employees the bonus pool formula, and they were energized as their results increased the size of the pool as well as their own possible bonus payment.
PQ business unit leaders occasionally wanted to build a reserve (i.e. commit to a lower earnings number) in their goals, if there were downside risks in their business plans not offset by upside potentials. I permitted them to do so. Adding up all the earnings of the business units, I would consider whether the corporate earnings goal was reasonably attainable. If not, I would build a president’s reserve into the company’s earnings goal. This is not common practice among many CEOs.
As the months passed, employees developed and executed strategies to exceed their goals. With this new approach, PQ’s earnings grew from $14 million (adjusted for an adverse material competitive situation) to $43 million over five years which included 9/11 and the severe recession of 2002.
After 2000, we never had a down quarter. As measured by revenue growth, earnings growth and return on assets, we moved from fourth quartile performance to first quartile performance, compared with 17 public peer companies within the chemical industry.
I did not achieve these earnings results — the men and women who operated our businesses around the world achieved them. I focused on tone at the top, corporate culture, ensuring we have the right people in senior leadership positions, and corporate strategy.
My approach as CEO of PQ — setting reasonably attainable goals that resulted in achieving earnings growth — was endorsed by Shark Tank star Kevin O’Leary. At the 2018 Disruptor 50 conference in Philadelphia, O’Leary discussed the factors that influenced the return of capital of the 37 companies within his venture portfolio. O’Leary said, “A study showed … 90 percent of the [cash] returns came from companies run by women.” Why?
O’Leary said, “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 … 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. 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.”
The shareholders of the company don’t know what the annual financial goals of the company are and don’t care. They only care if the financial results exceed previous year’s results and exceed the investment returns of similar companies within the industry.
The goal-setting process is a means to an end — great performance. As leaders of our respective organizations, we should change our paradigms about goal setting. Financial goals should only be an intermediate target, and exceeded by the greatest extent possible, in an environment where employees are rewarded 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.