Play big or play safe: a CEO can’t have it all
Recent research reveals why some executives negotiate easier goals while others embrace ambitious challenges
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When Elon Musk declared that Tesla aims to have “hundreds of thousands, if not a million” self-driving taxis on US roads by the end of 2026 in a CNBC interview, it was another example of a CEO setting a bold target publicly. Leaders like Musk often position themselves as visionaries, unafraid to shoot for the moon and literally, Mars.
Not all CEOs share the same appetite. Since their compensation is often tied to company performance, many have chosen to set more realistic and sometimes conservative targets to minimise the risk of missing goals while maximising the likelihood of securing bonuses. So, what factors make a CEO set high goals or play it safe?
“CEOs typically have their own vision and expectations, and sometimes possess unique information that others don’t have, which means they can meaningfully influence how targets are shaped in ways that reflect their preferences, priorities and insights,” says Wu Fan, Assistant Professor of Accounting at the Chinese University of Hong Kong (CUHK) Business School.
While company performance targets are formally approved by the board of directors, they are often the outcome of negotiations with the CEOs. Professor Wu’s recent research identifies two types of CEO power, structural and prestige, which influence how the executives set and negotiate these targets.
Structural power arises from formal authority within the company, such as when a CEO also chairs the board or holds a dominant position that protects him or her from being ousted by shareholders. Prestige power, on the other hand, stems from external force, such as the CEO’s social standing, reputation and elite networks. CEOs with high structural power tend to negotiate for easier targets, while those with high prestige power are more willing to go the extra mile.
How past performance affects future goals
Professor Wu and his collaborators, Aishwarrya Deore of Georgetown University and Matthias Mahlendorf of Frankfurt School of Finance and Management, analysed CEO annual performance targets from various firms on the S&P index.
In their study titled CEOs’ structural power, prestige power, and target ratcheting, Professor Wu and the team examined how CEO’s past performance and their type of power affect their target settings in different ways. Companies normally use previous performance as a benchmark for establishing future goals, commonly known as target ratcheting.
The researchers observed an asymmetric target ratcheting trend in their overall sample, where the degree of target adjustments was noticeably unfair: good performance brings tougher goals, but bad performance doesn’t lead to much relief. “If the CEOs do better than the expected target, the future target tends to go up a lot. But if the CEOs underperform, the future target doesn’t fall by nearly as much, or might not go down at all,” Professor Wu says.
CEOs with limited power face the most imbalanced target adjustments. After performing satisfactorily, their targets are significantly ratcheted up, making them increasingly difficult to achieve over time. Having high power, either structural or prestige, shields them from such ratcheting pressure. However, there are fundamental discrepancies between the two types of power.
To bargain or to impress?
High structural power gives CEOs more favourable ratcheting as they can negotiate smaller target increases after achieving goals or larger decreases if they miss targets.
CEOs with high prestige power can also settle for a more achievable target, but they tend to choose the opposite for several reasons. Pursuing ambitious goals signals their capability and confidence to their external network, including investors, analysts and potential future employers. “Accepting a more challenging target signals a CEO’s value to the market, which is essential to their career prospects,” Professor Wu adds.
Target adjustment not only affects the CEO’s earnings but also has broader implications for the corporate culture. Setting easier targets may risk weakening the CEO’s motivations to push for operational or strategic improvements if lower goals persist. “This could lead to a culture of complacency at the top, where performance plateaus and innovation slows,” Professor Wu says.
However, setting higher performance targets is not without its flaws. “While prestige-powered CEOs could foster a more aspirational performance culture within the firm, this could also come with increased risk-taking or pressure on subordinates to meet lofty goals,” he adds.
Pursuing higher goals demands greater effort, and Professor Wu notes that many CEOs with prestige power are aware of the trade-offs. “Ambitious targets can attract market attention, bolster a CEO’s reputation and unlock benefits like prospective board appointments. So, even if there is a risk of missing targets and losing compensation, some see ambitious target-setting as a net gain in other ways, like elevating their profile as bold leaders or enhancing public visibility.”
Industry and culture factors
Given that structural power may lead to stability and stagnation, whereas prestige power can result in growth and volatility, Professor Wu suggests that boards should also refer to external benchmarks, such as analyst forecasts and target adjustment trends among peer firms, to assess whether a proposed target is reasonable. “These comparisons can help distinguish between credible ambition rooted in performance potential and excessive promises that may not be grounded in reality.”
Finally, while the study offers valuable insights on the influence of different types of CEOs in setting their target performances, Professor Wu expects the effects would be more pronounced in innovative industries, including artificial intelligence (AI), technology, electronics, robotics and such, where leadership vision plays a larger role in shaping firm direction and investor expectations.
Individualism-oriented markets like the US may also create stronger incentives for CEOs to demonstrate ambition, as opposed to more hierarchical or risk-averse cultures like those in many parts of Asia, where the CEOs may be less inclined to overpromise. However, he notes that CEOs are a highly self-selected group, and “individuals who reach these roles often share certain traits like confidence, risk tolerance and a desire for recognition, which may transcend national or industry boundaries.”
About Professor Wu Fan
Professor Wu Fan is an Assistant Professor of Accounting at CUHK Business School. His research primarily focuses on the real effects of disclosures on corporate innovation and operational decisions, corporate governance, and management control systems. He received his PhD and MSc degrees from Frankfurt School of Finance and Management, and his BA from Xiamen University.