Goal setting is among the best ways to help poor-performing employees improve their performance and strengthen the psychological contract between employer and employee. When done right, it can have a positive impact on any employee's performance and job satisfaction. You can encourage development by creating quantifiable and attainable goals and also actively helping grow the firm, improve its reputation in the industry, and enhance the overall employee experience.
Goal-setting theory in its modern form comes from studies by American psychologists Locke and Latham that detail how setting goals in the workplace can boost employee performance. This theory is closely related to the concept of the psychological contract, which refers to the unwritten expectations and obligations between an employer and employee.
Goal setting involves the proactive process of identifying your business goals or objectives and creating a plan of action to achieve them. Despite being first developed by Locke in the 1960s, goal-setting theory remains relevant in modern workplaces, helping both individuals and businesses improve productivity while maintaining a strong psychological contract.
Goal setting enables individuals and organizations to achieve higher productivity levels with minimal effort. Goals can be a useful tool in refining your business processes for maximum efficiency and managing the psychological contract. Here are some benefits of setting goals for employees:
Goals give employees and leadership a common purpose. Employees who understand and recognize the organization's goals find it easier to align their work and personal goals to meet business targets, strengthening the psychological contract.
Goals give employees guidance on how to spend their time, which tasks to prioritize, and the effort required. It encourages employees to make informed decisions and devote less time to irrelevant tasks, contributing to a positive workplace culture.
Goals encourage employees to develop actionable plans. With a clear goal in mind, employees can create proactive plans to achieve set goals and fulfill their part of the psychological contract.
Goals inspire and motivate employees to work on their performance. Employees engage their creativity and strive to find resourceful approaches to tackling tasks, enhancing their job satisfaction and overall employee experience.
Goals are an important metric in measuring success. All forward-thinking businesses strive to improve and flourish as they expand. By comparing real and desired performance expectations, goals provide a clear roadmap and technique for evaluating organizational success and managing the psychological contract.
By now, you have an idea of the role of goal setting in employee performance and maintaining a strong psychological contract. To develop best practices in your business, it is critical to set goals for your employees. Consider the following tips to successfully implement a goal-setting culture in your organization:
Avoid imposing employee goals in a top-down manner. Goal setting should be a team effort, so make sure not to introduce goals as sanctions and isolate the employees. Leadership will usually have an overview of business and team priorities, which they use to identify team performance benchmarks. However, employees must be brought into the conversation and included in the goal-setting process. Setting goals with your staff helps to build a culture of continuous feedback and open dialogue, reinforcing the psychological contract. Employees who have clearly defined goals are more likely to push themselves, take on new challenges, and feel connected to larger initiatives. Employees who participate in goal setting are more invested in their productivity from the start and hold themselves accountable for the outcome.
Employee goals should complement your business's growth strategy and organizational values. Employees are more focused and driven to achieve goals that benefit both the company and themselves when they understand how their specific roles and responsibilities fit into the wider picture. Employees are kept motivated in their jobs when you share strategic business goals, frequently highlighting the corporate mission. You can link your business performance goals to important strategic objectives, which can then be converted into team performance goals. As a result, employees can embrace accountability because they understand how their individual performance affects the organization and contributes to the psychological contract.
Encouragement and support go a long way in keeping employees motivated and committed to their psychological contract. People feel more empowered when they are encouraged to achieve their goals.
Providing encouragement and support at work has an impact on people's impressions of the organization's openness and inclusion, which are key aspects of workplace culture. Many employees do not get advice or reassurance from their superiors, despite the positive effects it can have on overall performance and job satisfaction. Simple reminders to keep pushing and that they are on the right track, even when things aren't perfect, can be very encouraging to employees. Support can also be even more direct, assisting employees in understanding the actions or techniques that would lead them to their desired outcome and fulfilling their psychological contract.
It's vital to reward employees who meet or surpass their targets. Rewards could be a salary bonus, a certificate of achievement, or even an announcement at staff meetings. These employee recognition programs recognize the employee's achievements and show that the organization values this kind of dedication and hard work. These rewards could even motivate the rest of the employees to strive hard toward their goals. When their efforts go unappreciated, employees may reasonably believe there is a psychological contract breach, and they may cut their productivity or even begin searching for a new job where they might feel more appreciated.
It's normal for a business's priorities to change over time. Goals that feel relevant today are subject to unexpected influences and might lose relevance in the future. In business, change is both natural and unavoidable. To stay relevant and effective, you must adapt to such changes and manage the psychological contract accordingly.
Achievability is an important element of the SMART goal framework and crucial for maintaining a positive psychological contract.
When the goal is too ambitious or feels unachievable, goal-setting is likely to fail regardless of the employee's skill set and available resources. Saddling an employee with an unattainable goal might result in frustration with the system and a lack of enthusiasm to grow further. They may lose interest in expending effort on what feels like an impossible goal, potentially leading to a psychological contract breach. When engaging with employees on their goals, make sure to take previous performance standards into account. Consider whether someone else with similar experience and training has accomplished a similar target in the past when determining how achievable a goal is.
Regardless of how hard they work, not every employee will achieve the targets you set for them. You should evaluate progress regularly and intervene as necessary. If an employee fails to meet their goals by the agreed-upon time, there should be an open conversation about what went wrong. You should also offer encouragement and adjust the stated goals if required to maintain a healthy psychological contract.
It is your responsibility as an employer to create a healthy working environment that promotes employee development and maintains a strong psychological contract. When goal-setting is portrayed as a contest or rivalry between employees, it can create conflict and cause a backlash. It can also swiftly sabotage a positive work environment and workplace culture. Ensure that you take steps to cut off internal rivalries, as they can damage morale, leading to dissatisfaction and resentment.
Your workforce's ability to reach its targets may be affected by issues outside its control. Assess whether any obstacles would make it much more difficult for your team to succeed before assigning goals. If there are any, you must address these obstacles so that your team does not feel set up to fail due to factors beyond their control, which could lead to a psychological contract breach.
In such cases, you can adjust the objectives to make them more achievable. It's worth doing this if the goals aren't critical to your organization's performance and you don't intend to get a direct return on your investment. Another option is to offer more resources to your employees to help them manage these limitations. Even though there are obstacles, they shouldn't damage your ambition. You should invest in your employees to help them succeed and maintain a strong psychological contract.
One of the most effective ways to keep employees motivated and engaged is to help them find a sense of purpose in their work. Your staff is more likely to stay loyal to your organization if you keep emphasizing the underlying purpose of the goals you set. A sense of purpose has a direct influence on the quantity and quality of work that your employees put in. A sense of purpose will help employees find deeper meaning in ostensibly mundane and repetitive tasks, which can work wonders for their productivity levels and job satisfaction. To create a sense of purpose, try sharing how the goals you set for them will help the business create a positive societal impact. This gives employees a direct line of responsibility and encourages them to commit more time and effort to achieve their goals, strengthening the psychological contract.
Goal setting is beneficial to individuals and businesses in several ways. An informed and clearly defined strategy for employee goals keeps the workforce focused and can motivate them far more than even financial incentives can.
When properly implemented, goal setting can significantly influence overall productivity, profitability, and employee satisfaction in your business. Drafting a clear framework and considering the tips put forward above can change the performance management narrative in your workplace and help in managing the psychological contract effectively.
1. What is Goal‑Setting Theory and where did it originate?
Answer: Goal‑Setting Theory, developed by Edwin Locke in the 1960s and refined with Gary Latham (notably in their 1990 work A Theory of Goal Setting & Task Performance), posits that specific and challenging goals, along with feedback, drive higher motivation and performance than vague or easy goals. Its core principles are clarity, challenge, commitment, feedback, and task complexity.
2. What are the core principles of Goal‑Setting Theory?
Answer: The five key principles are:
Clarity – Specific and well-defined goals prevent confusion.
Challenge – Harder goals increase effort and persistence.
Commitment – Engagement and buy-in are essential for performance.
Feedback – Monitoring and adjustment keep efforts aligned continuously.
Task Complexity – Breaking complicated goals into smaller steps avoids overwhelm.
3. How many goals should an employee set?
Answer: Experts recommend focusing on 3–5 major goals per person or team to avoid diluting effort. While up to eight may be manageable, more can reduce focus and performance impact.
4. What if circumstances change and goals become irrelevant?
Answer: Goals should be regularly reviewed and adjusted if external factors disrupt them. It’s normal for plans to shift, and adapting ensures goals remain realistic and mission-relevant.
5. How do SMART goals relate to Goal‑Setting Theory?
Answer: SMART is a practical offshoot of Goal‑Setting Theory—ensuring goals are Specific, Measurable, Achievable, Relevant, and Time-bound. This framework operationalizes the theory’s principles, helping create clear, actionable targets.
About Author: Jenna Bunnell is the Senior Manager for Content Marketing at Dialpad, an AI-incorporated cloud-hosted unified communications system that provides valuable call details for business owners and sales representatives. She is driven and passionate about communicating a brand’s design sensibility and visualizing how content can be presented in creative and comprehensive ways. Jenna Bunnell also published articles for domains such as Freelance Writing Gigs and Codemotion. Check out her LinkedIn profile.