Incentive compensation management can't be tied to budgeted numbers

by on June 26, 2009 · 0 Comment POSTED IN: HR Info Center

Budgeted goals and incentive compensation management

We learned over time that if you measure numbers in incentive compensation management, you get a pat on the back, but if you miss your budget, you get a stick in the eye or worse, you might even lose your job. So, everybody’s trying to hit his or her situation.

The big problem we have from an ethical point of view is, if you think about this game of incentive compensation management tied to budget, tied to planning and control, if that’s the main way you control your organization, the main way you set your goals and objectives, if that whole process begins with a game of liar’s poker, when do your people ever learn to tell the truth?

In many cases, what we see this whole link between incentive compensation management and budgeting is one of the most damaging practices in management. It rewards people not to reach to the stars, but to minimize.

And I wish the examples that I am giving you were hypothetical, but unfortunately they’re not. If we take a look at what happened at WorldCom we see the same thing. At WorldCom the game was well-understood. Everything was about living up to the CEO’s, Bernie Evert’s expectations.

He’d demand that you had a budget and then there was a mandate that should be 2% under it. Nothing else was acceptable. This was a quote directly from two WorldCom executives in financial times in 2002.

In summary, this whole negotiated budget approach of tying incentive compensation management sets up a gain that can destroy value. When we tie rewards to results, we incept people to negotiate the lowest targets for the highest rewards. We incept people behavior-wise to always make the bonus, whatever it takes and we’ll show you some additional examples in a minute about how people do that.

Negative forecasting in compensation management
In that situation, we never put the customer above the sales target, because we want to make sure we get paid. We don’t share knowledge and resources because that might uncover our cookie jars in terms of our ability to really negotiate the low target. We always ask for more than we need.

In that budgeting situation, how many times have you been in there and you think, well, I put the budget request in last year, they cut it 10%. I know they’re going to cut it again this year, so I need to ask for 120%, so when they get to cutting it, you’ll drift back to where I want to be.

So, it really becomes a gainsmanship going on there. You always ask for more than what you need. You always spend what’s in the budget. If you ever get it, you make sure you spend it. Why? Because next year’s numbers are probably based on this year’s actual, so I want to make sure that I, at least, enjoyed what I negotiated this year. But I also want to make sure that I’ve got it packed in there for next year. So, you always spend whatever’s in it.

Anything wrong, you always look for the eloquent excuse, you explain away the adverse variances.

Budget holdouts
Forecast, you never tell people where you want to be, where you actually are going to come out. If you’re behind, you don’t want them thinking negatively of you, so you tell them, I know we’re behind, but we’re going to catch up. And you keep rolling that excuse to the last possible moment. And if you don’t catch up, then you have to fess up.

If you’re over, you certainly don’t want to tell them that, because mid-year, they might up your budget, up your request. So, it really — it is a great game of hiding things when you tie incentive comp to that.

You always never beat the numbers. If I beat the numbers, that means next year’s target’s higher, so I certainly wouldn’t want to do that. And you, certainly, don’t take risk. It wouldn’t be prudent.

So, in many cases, this management process, this self-inflicted wounds, I call it, of tying compensation management and negotiated budget target is in many cases the norm. It’s one of the most devastating practices in management.

Edited remarks from the Rapid Learning Institute webinar: “How to Avoid Incentive Pay Plan Disasters” by Steve Player

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