Managing expectations is important, in life as well as business, and it boils down to a simple formula that I came across: Happiness equals reality minus expectations. It's such a simple formula, like E = mc2, yet it's incredibly profound for managing the emotional state of your leadership team, the company and the investors. 

Somewhere in that tension lies your big dreams, aspirations and stretch goals. And what is the gap between reality and that goal or aspiration? And how do you motivate people to bridge that gap? If you set expectations too far ahead of reality, it could lead people to feel demoralized. And if you set expectations too low, maybe you don't reach your potential. So it's both the art and science of that simple equation.

Most people tend to work harder when they're winning, and winning is somewhat of an expectational state, in that it's arbitrary. If you set a goal and you exceed it, then you're winning, and people will work hard to stay in that winning zone. And if you set a goal and don't achieve it, then in theory you're losing. Which then raises questions about whether the initial expectations were set in a way to make people more or less motivated. So if you set the goals too high and don't meet them, then everyone in your organization is constantly living in the dissatisfaction of missed expectations, and it creates an emotional drag. Some people are motivated by being behind, but most people aren't willing to live in a situation where they don't feel they're living up to expectations for a long period of time.

So the lesson is that there is more than meets the eye with annual budgeting. You're trying to push yourself, but you're also trying to be accurate and manage expectations between the management team and the board and Wall Street. And then you get monthly and quarterly reminders of how well you're doing against those expectations. I've seen how the motivational energy of the organization changes when it felt like we were winning and when it felt like we weren't. And the truth is, there are times when it's easier to do that than others. But I've really come to appreciate that, as a leader, you have to recognize that you hold the strings to the emotional well-being of the company in this budget-setting process. When you see it that way, it takes on a whole different dimension.

Finding the right balance at any moment is what I call an active state of performance, and what might be in balance at one moment and one context is out of balance at another moment. So if you talk about the role of leadership in decision-making and resource allocation, we are constantly fine-tuning many decisions. It's like a big sound-mixing board, and you're constantly trying to keep the organization in some sort of balance, but in balance in context to the external environment. You control the internal environment. You don't control the external environment. So there are things that are always changing, which means you're constantly changing your balance. 

The last couple of years have clearly posed a challenge in setting expectations, because it's been so hard to plan. Our approach is to avoid participating in those moments when there is a frothy, crazy upside to the market. That way, I could put myself in a position to not participate in the wild, crazy downside. I plan for stability in the down market by never doing something so risky when the markets are good that somehow we become more vulnerable when the markets are bad. The point is to be slow and steady and up-and-to-the-right even when the world feels like a roller coaster. 

Agility is the best tool for survival. Being able to adjust up or down for our environments is an incredible tool for surviving any sort of changes. We may have our best long-range plans, but when you encounter unanticipated head winds, and you don't know how long they're going to last, it doesn't necessarily help to hold rigidly on to all of your long-range plans. You certainly should be adjusting near-term expectations to map closer to what near-term reality is. Generally speaking, when present forecasting becomes more variable and less predictable, you tend to pull in the investments for the future to shore up free cash flows in the present. Every company is placing bets on the future, and when things become unpredictable, often they pause those investments in the longer term to make sure they have enough cash to survive the nearer term.

Ultimately, the role of leadership is to allocate resources. People, money and time are the raw inputs that we use to create value and ROI. And the role of leadership is to essentially place the bets on where resources go. How many resources go into each department? What's the right balance? How many resources are dedicated to the here and now, like this year's expectations? What percentage of your resources are looking beyond the current horizon and building a bridge into future growth? How many people do you have on various projects, and how long should they stay on those relative to every other place that you could apply resources? That really is the job. We are resource allocators and we're constantly evaluating our environment, the competition, the macro-economic environment, the stability of our geopolitical systems. And we have this gigantic mixing board of all our resources, and we're dialing up some and dialing down others at moments in time. 

To succeed in this kind of environment requires recruiting people with the right DNA, and that's one of the roles of HR. Another is helping finance and other business leaders understand how their decisions are impacting the emotional well-being of the organization as a whole. It's about helping them understand the equation of Happiness = Reality Minus Expectations. When they don't understand it, you need to help them with messaging and figure out how people can keep the faith through the hard parts. 

After all, many times HR does manage most of the communications in the company. You want to be real with employees about the challenges you're facing, but you don't want to be so real that they give up hope that they can fix it in time. Therein lies a balancing act. I like to say the world is built on optimism, for the most part. You've got to show tangible progress that allows people to believe that what you are striving for is achievable. That is one of the quintessential challenges of leadership. Going through any transformation or going through any macroeconomic external turmoil, it's our role to help and demonstrate how we will all get to the other side alive and continue to thrive.  

Andre Durand is the CEO of Ping Identity.