Say a regional leader has just finished the best year of her career, and someone in the planning session asks what number she can commit to for next year. She pauses, names a figure that sounds almost deliberately ordinary, and the room lets it pass. Everyone present understands the arithmetic she is doing. A strong year will not be remembered as a strong year. It will be remembered as the new baseline, and she would like to be measured against something she can reach a second time.

Economists call what she is guarding against the ratchet effect: using current performance to set future targets "can discourage effort and reduce performance," in the words of the study below.1 The idea is old and the instinct behind it is older, and it comes in two versions: the person who lowballs, and the person across the table who suspects the lowballing.

What nine years of survey data showed

A Management Science study by Michal Matějka, Matthias Mahlendorf and Utz Schäffer went looking for the ratchet among high-level managers and executives, using panel data from nine annual surveys covering 2011 through 2019. The first result matched the folk wisdom: after a good year, targets went up. The second did not. Good performance in one period was associated with a decrease in how difficult managers judged their next target to be, and on that basis the authors rejected the ratchet effect hypothesis.1

They also use a model to show that the tests in earlier research "can falsely reject the null hypothesis of no ratchet effect."1 As I read that, some of the older evidence may have found a ratchet where none existed. Two cautions apply. The measure is perceived difficulty, the managers' own view of their next target, so I would not treat it as a direct measurement of effort. And the full paper is paywalled, so this piece stays within what the published abstract reports.

A target is a bet on how the organization will treat a good year, and each person places that bet according to what happened to the last person who had one.

Where the easing is strongest

The drop in perceived difficulty was more pronounced where well-performing managers had more private information about future performance and where long-term commitments were more credible.1 The abstract does not say what happens when both are missing, only that the easing is stronger where there is more of each. My read is that a manager who has better information about the coming year, and who believes the organization will honor what it has said, can look at a higher number and see something she can meet. Take away the belief and the ordinary figure in the planning session starts to look like a fair reading of the company's record, and no speech about stretch goals will change her arithmetic.

I looked at a nearby problem in When Owning It Gets Expensive, where ownership fell away as reputational risk climbed. The point to carry over is that people size a commitment to the consequences they expect.

The question for the next cycle

For a senior leader, the useful question is what your last several planning cycles taught people about the morning after a good year. Somebody in your organization already knows the answer, because they watched what happened to the person who beat the number. If the number went up and the recognition did not, the modest figure in the room reflects your own record. The reverse travels just as fast, when the number went up and the person was given room to meet it.

Two moves are within reach. Say out loud, before the cycle opens, how this year's result will feed next year's target, and then do what you said. When someone names a figure that sounds too safe, ask what they would need to believe to name a different one, because the answer usually tells you more than the number does.

What did the last person in your organization who beat the number get for it?