Target difficulty, target flexibility, and firm performance: Evidence from business units’ targets

Despite the importance of target setting for firms, prior research offers mixed evidence regarding performance consequences of target difficulty levels. While experimental research suggests that setting difficult targets can increase performance, empirical evidence in field studies is mixed and ambiguous. To explain this ambiguity, we introduce and analyze firms’ target flexibility with regard to adjusting targets intra-year. We argue that target flexibility is associated with both target difficulty and firm performance in the field and therefore can significantly contribute to an understanding of their relationship. Our examination of survey and archival data from 97 firms supports our predictions. We find that the difficulty of business unit targets exerts a direct positive effect, but an indirect negative effect on firm performance where the latter is partly mediated by firms’ target flexibility. Additionally, we find that the predominant use of targets for planning and coordination (vs. performance evaluation) mitigates both performance effects. Our findings may help explain mixed field study evidence regarding the effects of target difficulty.