A sales team beats its annual target by ten percent and collects its bonus. The market grew twenty percent. By the only standard that matters, the competition, the team lost ground while celebrating. This is the flaw at the heart of the fixed target: it is an absolute number set against last year's guesses, and it can be beaten in a rising market or missed in a falling one for reasons that have nothing to do with performance. A relative target fixes the reference point. Instead of competing against a number frozen in a spreadsheet, the organization competes against reality as it unfolds.
The distinction sounds technical and is actually behavioral. What you measure against determines what you pay attention to.
The number that ages badly
An absolute target starts aging the moment it is set. It encodes assumptions about the market, the competition, and the economy that were current during budget season and are obsolete by the second quarter. The manager then faces a target that reality has quietly divorced from relevance, and two bad options: chase a number that no longer reflects the environment, or spend the year building the case for why missing it was not really a miss. Either way, attention goes to the number rather than to the world the number was supposed to represent.
The gaming is structural. Because the target is negotiated and fixed, the smart play is to negotiate it low and then manage the appearance of the result. A relative target is far harder to game because the benchmark is external and moving: you cannot sandbag the performance of your competitors.
Measuring against the world
The Beyond Budgeting tradition built its control system on exactly this substitution. Bourmistrov and Kaarbøe (2013) documented multinationals replacing fixed budget targets with relative, outside-in targets based on performance against competitors, which pulled managers out of the budget's comfort zone and into a "stretch zone" of greater engagement with the actual environment. Matějka, Merchant and O'Grady (2021) found relative targets to be a defining feature of Beyond Budgeting adopters, alongside decentralization and flexible resource allocation. The founding case shows the mechanism at full scale: Svenska Handelsbanken, budget-free since around 1970, runs each branch as a profit center judged on relative performance against other branches and competitors rather than a negotiated annual figure. Nobody defends a stale number, because there is no stale number to defend. There is only the question of whether you did better than the alternatives.
Relative targets carry a caution of their own. A benchmark is only as honest as its comparison set: choose weak competitors, or a peer group flattered by circumstance, and the relative standard becomes as gameable as any absolute one. The discipline is in picking a reference that reflects the real contest rather than the most convenient one. Done honestly, though, the relative target has a property no fixed number can match. It cannot be beaten by a rising tide and it cannot be missed by a falling one, because the tide is now inside the measure.
Relative measurement also fixes the accountability that absolute targets blur. When results are judged against the market, a good year in a bad market counts and a mediocre year in a boom does not. The measure tracks skill and effort rather than luck and timing.
Semler saw the corrupting power of the absolute mark from the judge's chair. As he has told it, he once sat on the jury of a "best company to work for" award and watched it go to a bank where the tellers were not allowed to sit down, while an executive served kombucha to the visitors. His point was that culture certifications are bought: the company pays the fee, runs its own survey, and hangs the plaque. The plaque is an absolute number, optimized for and detached from the reality of whether a teller can sit. Semco never had the plaque; it had a hammock in the middle of the office. The lesson generalizes to targets. Optimize for the badge and you get the badge. Measure against reality and you have to actually be good.
That is the whole case for relative targets. An absolute number invites you to manage the number. A relative standard forces you to manage the thing the number was always supposed to stand for: how you are actually doing, against everyone else trying to do the same, in the world as it really is this year and not as it was guessed to be last year.
Sources
- Bourmistrov & Kaarbøe (2013). From comfort to stretch zones: a field study of two multinational companies applying 'beyond budgeting' ideas. Replacing fixed targets with relative, outside-in targets moves managers into a stretch zone of greater engagement with reality. https://doi.org/10.1016/j.mar.2013.04.001
- Matějka, Merchant & O'Grady (2021). An Empirical Investigation of Beyond Budgeting Practices. Relative targets are a defining feature of Beyond Budgeting adopters, alongside decentralization and flexible allocation. https://doi.org/10.2308/JMAR-19-010
- Lindsay & Libby (2007). Svenska Handelsbanken: Controlling a Radically Decentralized Organization without Budgets. Budget-free since ~1970, each branch is a profit center judged on relative performance rather than a negotiated number. https://www.researchgate.net/publication/247875136_Svenska_Handelsbanken_Controlling_a_Radically_Decentralized_Organization_without_Budgets