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How do you set performance targets?

How do you set performance targets?
June 08, 2023

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Setting performance targets is as crucial as it is difficult. They should benefit employees and the company. What are the key rules for setting targets, what mistakes should employers avoid and how are performance cycles regulated by law? We explain in this article.

Setting performance targets: good practice

Setting effective and relevant performance targets requires some methodology. They need to be properly drawn up by the employer, who has to be able to explain the benefits to the employee. In addition, the targets must comply with employment law.

SMART goals

‘SMART’ is an acronym for all the qualities that the targets set by the employer should have:

  • Specific
  • Measurable
  • Assignable
  • Realistic
  • Time-related.

‘SMART’ is used because any performance targets created for incentive compensation should be done so intelligently. They must be precise, easy to assess, realistic and consistent, and must be set within a specific time frame. Without this essential list of ingredients, the recipe for incentive compensation will go wrong.

Level of performance

Each target is part of a level of performance that only a company can judge. It’s important to set goals that motivate employees and are relevant to the company’s overall strategy and its economic and financial health. For this reason, the company should decide on the expected level of performance on its own.

However, the level of performance should be explained and discussed frankly with the applicant so that they commit to the company’s plan. Imposing targets without explaining them beforehand will inevitably result in the employee deeming them unfair and not achieving the desired performance.

Resources given to employees

While the level of performance cannot be negotiated with the employee, any more than the set goals, the resources provided to achieve them can be discussed. The employer must present the employee with all the tools that they’re willing to make available for them to successfully carry out their tasks. The employee should be aware that they can ask for additional resources to achieve the goals they have been assigned. This discussion is highly motivating for the employee, as it encourages them to set the most ambitious goals.

Legal obligations

While a company is not obliged to have the performance targets contractually approved by an employee, it’s important that the employee understands and accepts them. Since targets are bound to change over time, the employer needs to formally communicates the new targets to be met. It’s therefore advisable to set the weighting of incentive compensation and the rules governing it by circular each year.

Furthermore, although the proportion of incentive compensation in an employee’s salary is decided by a company, it must comply with the legal obligations. The employer must therefore ensure that employees are treated equally. In other words, all employees in the same job must receive the same fixed and incentive compensation. Violations of the rule of ‘equal pay for equal work’ can lead to legal action against the employer.

However, it is of course possible to differentiate between two employees with different profiles. If they have different academic backgrounds, skills and experience, the company can adjust the incentive compensation, and therefore the goals, accordingly.


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Mistakes to avoid in setting targets

To avoid resignations and retain talent within a company, it’s essential to avoid mistakes when setting performance targets. Setting unattainable goals and allowing employees to negotiate the nature of the goals are two mistakes that should definitely be avoided.

Overly ambitious targets are a source of demotivation

For a bonus scheme to motivate employees, the targets set need to be realistic. Setting unrealistic goals is counterproductive, as employees can’t achieve them so would rather quit than achieve them. At the same time, employers should bear in mind that a bonus scheme should contribute to both an employee’s career plan and a company’s roadmap. Setting the wrong targets is therefore also detrimental to the company, as it will not achieve the expected overall level of performance.

The time frame is a key element of the target to be achieved. Deadlines that are too short are unreasonable and can be bad for employees’ mental health. Employees are then entitled to take legal action. Although there is no strict legal framework for setting deadlines, the law punishes employers who set unfair deadlines and those who set targets too late instead of at the beginning of the performance cycle.

Employees should not set their own targets

During a job interview, and more generally in each new performance cycle, it’s very important for an employer to uphold these three principles:

  1. The level of performance expected is decided by the company.
  2. The targets are non-negotiable.
  3. The resources given to the employee to achieve the targets can be discussed.

These rules must be fully understood by the employee. Once the level of performance has been correctly assessed and the targets set, only the tools given to the employee to succeed in the performance cycle can be negotiated. Deviating from these principles is therefore deeply unfair.

In fact, an employee who proves to be an excellent negotiator will easily be able to negotiate their targets to their advantage. But their colleagues who are less skilled negotiators are forced to accept the terms set by their company. This means employees with stronger negotiation skills are rewarded more than the others, even though they all attained the same performance.

The objectives of incentive compensation: what does the law say?

In France, incentive compensation is still very poorly regulated by law. Each decision handed down by employment tribunals or by the judges of courts of appeal or the Court of Cassation serves as case law in this area. As regards performance targets, however, the courts may sanction an employer who sets unreasonable deadlines or unattainable and unfair targets. Targets must therefore be set in a fair, relevant and honest manner.

In setting performance targets, it’s crucial that they’re both beneficial to the business and motivating to employees. Managers need to explain to employees how and why they should be set. Discussions about performance should be straightforward and clear to avoid misunderstandings with employees. If the company decides on the level of performance and the targets to be achieved by an employee, it must always ensure that it respects the principle of fairness between employees and avoids settings inconsistent and unrealistic tasks.

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The 10 golden rules of incentive compensation

Find out the incentive compensation white paper gathering best practices and pitfalls to avoid to set up incentive compensation plans

Blog post author

Hervé de Riberolles

For more than ten years, I have been leading a number of projects for our customers to diagnose and re design the incentive compensation systems of their teams. The diversity of environments (sectors, countries, populations) that we face, my team and myself, requires a perpetual adaptation of our methods and our offer. The motivation of employees is, from my point of view, exciting, constantly evolving and at the crossroads of several areas of expertise. That's what makes it so interesting.

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