Corporate budgeting is broken - Let's fix it

Corporate budgeting is a joke, and everyone knows it it consumes a huge amo unt of executives' time, forcing them into endless rounds of dull meetings and tense negotiations. It encourages line managers to lie and cheat, lowba lling targets and inflating results. And it turns business decisions into e laborate exercises in gaming. The sad thing is, budget shenanigans have bec ome so embedded in corporate life that they're accepted as business as usua l - no matter how destructive they are. The source of the problem is using budget targets to drive managers' compen sation. In a traditional pay-for-performance compensation program, a manage r earns a hurdle bonus when performance reaches a certain level. The bonus increases with performance until it hits a maximum cap. These "kinks" in th e pay-for-performance line create incentives to game the system. When perfo rmance approaches the hurdle target, a manager will try to accelerate the r ealization of revenue and profit. When performance hits the cap, the manage r has a strong incentive to push revenue and profit Into the next year. To eliminate inducements to game the system, companies should adopt a purel y linear pay-for-performance scheme that rewards actual performance, indepe ndent of budget targets. A manager receives the same bonus for a given leve l of performance whether the budget goal happens to be set beneath that lev el or above it Severing the link between budgets and bonuses eliminates man agers' motivation to lowball targets, and it takes away incentives to move revenues and expenses around when the end of a budget period approaches. No t only does this remove the costs of gaming, it also frees managers from al l the time they traditionally had to devote to it.