For organizations with calendar year-ends, November is typically the month for finalizing next year’s performance plans. While these can feature a balance of measures, these incentive plans often focus heavily on tying bonus payouts to achieving budget targets. Many admonish the need to “pay for performance.” But I question, “What are you really doing?” Is it “pay for performance” or “pay for negotiated results”?

The process begins with managers submitting their proposed budgets. These often feature low goals (which could be called conservative but are more often known by their common name of “sandbagging”). Corporate must then reject them as too low and/or begin negotiating to leverage them up to a minimum acceptable level. The back-and-forth has several negative consequences.

1. It wastes valuable management time and costs money.

2. It strips local managers of their natural accountability as their plan is squeezed into corporate’s goal.

3. It causes managers to hoard information. No one wants to share information that could be used against you.

4. It can lead to unethical behavior.

5. It causes the organization to limit their potential by focusing on easy-to-achieve targets.

6. It rewards the best negotiators instead of the best operators.

7. In the words of Jack Welch, “this budgeting sucks … the energy and big ideas out of the organization.”

So, is tying incentives to budget targets “pay for performance”? No. At best, it is pay for negotiated results. It is a management process that can kill your organization and is part of the dumb stuff that finance should stop doing.

For more on what you should be doing instead, see my blog post on “Rewards & Incentives” at Adaptive Planning’s community site here.

Join us in the Beyond Beyond Budgeting Round Table here. ###