There are also psychological and cultural aspects that impact how an organization sets targets.
If an organization is risk averse or if management tends to look for someone to blame when performance falls short, targets will be predictably less aggressive and easily achievable. This is usually referred to as “sandbagging” and occurs because the penalty for under-achieving a target is so much greater than the risk of being accused of setting soft targets.
On the other hand, organizations that reward real achievement and where missing a stretch target is not punished, but merely analyzed for root causes and addressed, real “stretch” targets are more likely.
If you're in an organization that leans more toward the risk averse culture, how do you encourage employees to set real stretch targets?
First, examine the management style and their reaction to missed targets. If it is punitive in nature, that managerial behavior must change or the employees will never trust management enough to take a risk and set a stretch target.
However, I have seen organizations where the management reaction to missed targets is healthy, yet the targets are still easily achievable for other cultural reasons. Sometimes these reasons are merely perceived, but as we know, perception is reality.
In that case, an organization can set both “realistic” targets for their strategic measures as well as stretch targets. If the stretch targets are achieved, some recognition is tied to it. If the stretch target is not achieved, there is no “downside” as long as the realistic target is achieved. So, the stretch target is perceived as all “upside” to the employee.
As an example, an organization I have worked with in the past has decided to tie year-end bonuses to organizational profitability, as well as some of the key customer and outcome measures on the organizational scorecards.
The current perception (though it's actually a misconception) among the employees is that underachieving in certain scorecard measures will affect the employee bonuses. Consequently, most employees have intentionally set or negotiated their targets to be very easily achievable.
To push the organization to higher achievement, leadership is considering additional recognition (not necessarily financial) for achievement of stretch goals to try to encourage more risk taking, albeit with little to lose.