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. ###

I would like to apologize to those of you who regularly look for my blog on Finance Transformation. As you may have noticed, I have not posted an update in the last five weeks. It has been a difficult period, and I appreciate your patience.

I have been working with my team at The Player Group to create an entertaining and enlightening path forward. One of our ideas is to share some of the things people say about planning and budgeting. We are also researching quotes about change in general and enabling change within your organization. Some quotes have a way of sticking with you. One that sticks with me is one from a boxer, who said:

“Everyone has a plan until they get punched in the mouth.”

Last fall’s economic downturn was a smack in the mouth for many organizations. The City of Chicago’s Olympic hopes of hosting the Summer Games took a hit when they were eliminated in the first round of voting. Here at The Player Group we suffered a tremendous blow when my younger brother, Michael, unexpectedly passed away last month. In many ways it feels like a boxer’s punch, and all life’s plans don’t seem to make any sense anymore.

When these things happen, you often must do what boxers do: Cover up and protect yourself from further damage. But you will never win if you stay covered up, hunkered down, or withdrawn from your pursuits. You have to find ways to re-engage. At The Player Group, we find strength in thinking about what Michael would want us to do. His voice still rings in our memory. We want to honor his wishes and strive to finish the work he joined us in.

Many exciting things are coming soon, including our new book on forecasting (coming to the U.S. in January 2010). We will also be announcing additional resources that will add dramatic new ways in which we can help you transform and also provide exciting new implementation tools, as many organizations are moving directly to implementation.

Today, I am happy to advise you of some great content on the Beyond Budgeting principles that are available through BBRT member Adaptive Planning. Please take a look at their Web site for my blog posting titled “Goals of Financial Planning: Stretch for the Best,” where I focus on switching from internally negotiated, annual fixed targets to stretch goals based on long-term external benchmarks to boost performance and increase shareholder value.

This blog posting can be found here.

If you are new to Beyond Budgeting, you should start with the blog posting titled “Budgets: The Case for Change.” ###

My week opens with a practice run-through for the BBRT’s upcoming webcast “How to Communicate Change: A Change without Migraines Resource,” featuring expert Rick Maurer. Click on this link to sign up.

Attendees will review the Cycle of Change, which starts with people “In the dark” and hopefully moves to “See the Challenge.” Both of these must be achieved before you can “Get Started.”

As I reflected on this conversation, I realized what difficulty many finance professionals have with change. Yesterday, I received an email from an accounting association executive we are trying to work with on transforming finance. The fact that he sent it on Sunday indicates his hard work and dedication to his mission. Yet his reply left me with great concerns. He and his staff had discussed our Beyond Budgeting proposal. They replied that they were interested in “better” budgeting. It is a response that I often get. more

In my last blog, I began explaining the changes in target-setting when switching to a rolling forecast to eliminate annual budgets. Target-setting switches to midterm targets that are relative to peers, competition, and world-class benchmarks.

This frees rolling forecasts, which should be used to help you steer your organization. But you need to avoid the devastating practice of “paying for forecast accuracy.” While many have started to advocate this, it is one of the dumbest things management can do. The cost payment is magnified by the tendency to suboptimize results. more

On a recent webcast, I was asked: “If we move to rolling forecast and eliminate annual budgets, how can we provide incentive compensation? Are there approaches for building incentives off of a rolling forecast?” I will answer that question in my next two blogs.

Most organizations base incentive compensation on reaching fixed budget targets. The standard reason for this is that they want to “pay for performance.” In reality, nothing could be further from the truth. This is one of the worst practices in management because what really happens is that the organization “pays for negotiated results.” Instead of rewarding the best performers/achievers, you reward the managers who successfully negotiate the lowest levels of performance and execution. As a result, your management process drives subpar performance. Forget about “being the best you can be” or striving for the maximum performance you can achieve. more