Working Paper | HBS Working Paper Series | 2012

The Effect of Target Difficulty and Incentives on Target Completion: The Case of Reducing Carbon Emissions

by Ioannis Ioannou, Shelley Xin Li and George Serafeim

Abstract

Setting targets and providing monetary incentives are two widely used motivating tools to achieve desirable organizational outcomes. We focus on reduction of carbon emissions as a setting in which to examine how target difficulty and monetary incentives provided to managers affect the degree of target completion. We use a novel dataset compiled by the Carbon Disclosure Project (CDP) that yields a sample of 1,127 firms from around the world. We find that firms setting more difficult targets or providing monetary incentives are able to complete a higher percentage of the target. The effect of target difficulty on target completion is nonlinear: above a certain level, stretching the target decreases the percentage of target completion. Moreover, we find that bundling difficult targets together with monetary incentives negatively affects the degree of target completion, suggesting that these two motivating tools act as substitutes in our setting. Finally, we provide evidence that both target difficulty and monetary incentives motivate managers to a) undertake more carbon reducing projects that generate more carbon savings, and b) invest more money in such projects, without increasing the average payback period of the project portfolio.

Keywords: environment; environmental performance; carbon; climate change; sustainability; incentives; motivation; Motivation and Incentives; Motivation and Incentives; Environmental Sustainability;

Citation:

Ioannou, Ioannis, Shelley Xin Li, and George Serafeim. "The Effect of Target Difficulty and Incentives on Target Completion: The Case of Reducing Carbon Emissions." Harvard Business School Working Paper, No. 13-043, November 2012. (Revised August 2014.)