September 26, 2021

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All you need to know about target contracts

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This article is written by Nihar Ranjan Das who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Table of Contents

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Target Contract is nothing but a management objective principle established by Mr. Peter F. Drucker in the year of 1955. In this principle at least two parties, usually one is the Employee and the other one is the Manager of a company, discuss their objectives and the Manager assign the same to the Employee and also provide a fixed duration to complete the work within that. At the end of the assigned period, an appraisal shall be arranged by the Manger to check whether and at what extent the Employee has achieved the assigned objectives.

Usually in foreign countries, employees claim variable compensations if they meet their agreed upon targets within the specified duration. The details of the variable compensations are normally established in the Employment Contracts. 

The main focus of the Target Contracts are, it aimed at motivating the Employees in best possible way and regularly support them to plan out their careers. This process is normally overseen by the assigned HRs, who regularly makes sure that, all the players involved in the game are looking to maintain the best strike rate in most of the time and performing systematically and consistently.

In a recent study performed by involving 241 companies of various sizes, it has been proved that, about 90% of the participated companies regularly prefer the using of Target Contracts. Even 85% of them also said that, target Contracts are working well for them and they are fully satisfied with this approach. 

So, it clearly shows that the companies prefer to go with the Target Contracts and there is also no doubt that, it works really well for them. However, there is still room for improvement in every way. In most of industries and professions, they generally defined the goals and targets on an annual basis. But this approach is now considered as outdated. The regular feedback, whether positive or negative, must be done in a timely manner, so that the Employee shall get sufficient opportunity to understand the goals and targets and adjust/improve himself accordingly. Hence, the companies are now moving towards the quarterly appraisal/performance review of the employees instead of annual reviews.  

Target Contracts are basically to motivate the employees and provide them the proper guidance for their targets. It also makes easier for the Managers to review the performance of Employees and suggest them the improvement to achieve the goal. However, target contracts have some disadvantages too, let’s discuss in details: 


  • The Employees are motivated as the performance review communicated to them on regular basis with proper feedback, rather than any emotions or arbitrary preferences; 
  • It helps the employees to prioritize the work, which helps them to segregate the work accordingly. That means it give the clarity that, which works shall be addressed first;
  • The things are so transparent that, both the Manager and the Employee get a clearer view of what is the exact requirement and how it should be done.
  • Employees are assigned with greater responsibility to get the job done during the specified duration, which define their personal path to set goals for future;
  • Commitment of goals foster, as both the Manager and Employee collaborated to establish and work on the goals/targets.


  • It is true that it helps the Employee to grow but at the same time this can increase pressure on the employees, which will definitely hamper the creativity and quality of the work;
  • Even with the employees, it might affect the work environment, which will ultimately affect the productivity  also;
  • Lack of consistency is the worst possible thing might happen during the engagement;
  • When the employee failed to reach the goals or targets, it may lead to de-motivation and the performance shall be affected as well. 

While defining goals, a decisive criterion is objective measurability. The Manager must be able to evaluate whether and how the Employee has achieved the assigned targets and most importantly, this determination should not be based solely on the subjective perceptions.  

The SMART formula is a very helpful method to define the Target Contracts. It can be actually used to ensure that, the targets are actually quantifiable.

SMART standing for:

  • Specific;
  • Measurable;
  • Achievable (Attractive/Accessible);
  • Realistic;
  • Timely (scheduled with defined time horizon).

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Step-1: Plan

First, everything needs to be planned by looking the business goals for the year ahead. Then plan how the employees will help to reach at that target within the fixed duration. While planning these points need to be considered:

  • What tasks exactly the target involves;
  • What skills and abilities required to perform those tasks;
  • What level of performance is expected from the employees

Step-2: Discuss

The next step is to arrange a meeting with all the assigned employees to discuss about the targets and setup a Target Contracts. Also try to communicate all the Employees about the planning, which has been done in the first step and discuss with proper clarification about the future targets, which may include:

  • The feedback of the employees performance;
  • The skills they need to adapt or improve to meet the market standard;
  • Their own ideas regarding the learning and development opportunities.

Step-3: Monitor

After going through the step-2, the duty of the Manager is to monitor the employee’s performance during the engagement and support them in every possible way to reach their goals within the specified duration. This also includes the following:

  • Give regular feedback to the employees.
  • Provide support to any underperformance employee to overcome with that.
  • Support employees in every way possible to improve their performance by providing training or mentoring opportunities.

Step-4: Review

The final step is to review and evaluate the overall performance during the course of time. The manager shall meet individually with each employee at least every quarter to discuss their performance against the assigned goals. It may also include the interim evaluation, especially during the initial year of the employee, if the target is changed or the employee is having any issues with the performance.  

Prior to the appraisal or performance review, it is the best idea to provide the employee a self-assessment opportunity to reflect on their own performances.

Examples of SMART Target Contracts

A. Bad wording: “Promote the Employer brand as much as possible.”

SMART wording: “Improve our ratings on Glassdoor by at least 1 start within this quarter.”

B. Bad Wording: “Attract young consumers for our new food products.”

SMART Wording: “Increase awareness of our new food brand among the men and women between the ages of 20 and 35 by 20% by the end of this calendar year.”

Other potential targets examples may include:

  • Generate __ numbers of consumer contacts within __ period of time;
  • Increase the website visitors by __% within __ months;
  • Increase the website conversion rate by __5 within___ months;
  • Generate ___% of positive interaction on our social media channel within ___ months;
  • Publish ___ numbers of articles in our websites within next __ months;
  • Increase the market share by ___% in the next financial year.

If the Manager will like to set SMART targets for its employees, a lot of thoughts need to go into the planned targets. If it is required to change/redefine the process, how long does it take to establish the new ones? Selected employees shall be forced to think about how and in which way exactly they can achieve the target easily.

Which Employee shall be eligible to get Target Contracts? 

As far as it makes sense, every employee should get a chance to get Target contracts. However, there are also few situations where it is difficult to make the targets quantifiable. That means the targets, where no mistake shall be permissible in any manner, like the job of a safety consultant. In such types of cases, it generally needs to be avoided to discuss about target contracts.   

What shall be the duty of the Manager if the Employee is below the target?

In such type of scenario, the Manager must intervene as early as possible and discuss with the employee to analyse the situation closely and then work on it to overcome the situation in the best way possible. But most importantly the employee himself/herself has to overcome this situation by applying his/her own innovation rather expecting someone to do the same on behalf of the employee. 

What role the Manager must play in defining Target Contracts?

First of all, the Manager must have to ensure that, the targets are perfectly set. Secondly, he should monitor the thing in a consistent manner to achieve the goal within the fixed time and if and when necessary redefine them accordingly. The good quality of the manager is that they are fully aware about the importance of Target Contracts for the companies as well as the employees. The Manager who is fully aware about his employees can agree for more challenging goals with special high potentials. But at the same it is also important that, the employees shall be challenged, but not overburdened.   

Target Contracts are valuable tools for the companies to drive success. At the same time they also offer valuable opportunities for the employees to realise their potential and provide them the regular performance report for continuous improvement. It is also important to take care of various formalities while defining and formulating the target contracts, such as: the Goals/targets must be set out promptly in writing in order to make them binding. The Manger and the management team must invest sufficient time to plan for finding and formulating the targets.    

  2. (Target Cost Contracts)

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