Tying budgets to compensation management goals rewards excellent negotiation skills

by on June 25, 2009 · 0 Comment POSTED IN: HR Info Center

Compensation management and negotiated budget targets

It’s a major compensation management problem, when we tie budgets to incentive compensation; we set up a huge conflict of interest. We incept our managers not to optimize output, not to optimize results, but instead to negotiate a target that they can reach.

Most people are smart enough to know that if I’m negotiating a target, I want to make sure it’s easy to reach, because they learned a long time ago, it’s far easier to negotiate a low target than it is to deliver outstanding performance.

In many cases, when we tie budgets to negotiations, everybody ends up sand-bagging, everybody ends up low-balling the estimate, because it’s just a natural way to make sure you reach it.

Jack Welsh, negotiations and compensation management
The best example I can see of this, comes from Jack Welch, the former CEO of GE.. He describes how a field organization negotiated with a corporate organization as to what their budget should be.

The field team comes in and they’ve been spending weeks and weeks preparing for a presentation at corporate. And they’re trying to build their business case for what their budget target should be and the link to their individual compensation management and incentive plans

The field team comes in talking about all the difficulty they’re having and they say, ‘Hey, if we get maximum effort, we can do a little bit better than we did last year. We can deliver maybe 10.’

Corporate executives, knowing that minimal targets from all the different field organizations, won’t add up to enough to cover the corporate goals and objectives. They’ve go to leverage up

Corporate leverage in compensation management negotiations
So, the corporate starts talking about best practices, blue ocean strategy, how to reach for the stars and what you ought to be able to do with innovation. It’s a goal and objective. It’s to leverage up.

Headquarters says, ‘Hey, you’ve got to do 20.’ And so, for the better part of the day, there’s a discussion back and forth between 10 and 20. It often happens in a windowless room when no customers anywhere in sight. After hours and hours of discussion, they settle somewhere in between a negotiated budget number. Let’s say, 15 and that’s a negotiated settlement.

At the end, the field team drags themselves out.. They look like they’re just beaten to a pulp. As soon as they clear the corporate headquarters, they begin to high five each other, because when they talk, ‘Well, man, that 15 will be tough, but at least we didn’t have to give up 20.’

The corporate officers back there, they begin to high five themselves, ‘Hey, we got them up to four. Can you believe they came in thinking that they can get away with 10? We, at least, got them up to 15.’

And at the end of the day, you have to ask yourself, Hey, did we really add any value in that negotiation? Because in that situation, it’s really about a negotiated settlement, not about optimization, not about what you can do, but really what’s the compensation management target that we can nail easy.

Information is power with compensation management
Information is power, so you see a lot of sand-bagging. You don’t really see all the transparency because everybody hides their results and their potential. Why? Because I’ve got to keep my cookie jars hidden.

And the cookie jar that you’ve got hidden is pervasive throughout the organization. This corporate example with a field coming in and talk with a vision has replayed itself three or four times before it ever got to this level as the field organization rolled up its budget so that it kind of comes bottom up.

That’s the reason so many budget exercises take so many iterations, they bounce back and forth, because everybody’s trying to negotiate the minimum amount that’s acceptable.

Why do we play that game? Well, because everybody knows that it’s an invigorating exercise in minimization. Nobody wants to have to hit high targets for their compensation management goals

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

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