Bonuses can be an effective and energizing incentive structure, pushing employees to meet or exceed sales goals with the promise of a payout. But recent headlines have shown the darker side as well: When employees are aiming for an unrealistic target—based on out-of-date assumptions and static information—shortcuts and unethical behavior can creep into normal workflow.
Relying only on a static, annual budget may be part of the problem, as goals that seemed within stretchable reach one, two, or even 10 months ago become all but impossible as the competitive landscape shifts or the economy changes. Scrapping the bonus compensation structure altogether is one solution. But there might be a better way to solve the problem.
“Large rewards tied to challenging sales goals do not have to be a deadly combination,” three leading management consultants argued in a Harvard Business Review article. Used correctly, they can effectively motivate staff and drive revenue.
So how do you ensure incentives are challenging but still reasonable? Consider rolling forecasts.
Many finance teams already like these budgets, which are continuously updated based on changing conditions, because they’re more accurate than static versions set in stone for the whole year. Flexible plans help to kill the stereotype of an annual budget, painstakingly created over many months, that becomes instantly outdated upon completion.
Rolling forecasts also make it easier to tie compensation to actual results. Traditional budgeting compensates performance based on “annual, static, and often irrelevant budgets,” according to a PricewaterhouseCoopers white paper urging the elimination of such techniques. What’s worse, more than half of companies surveyed by PwC said an annual budget is one of the major drivers of executive pay—meaning that most workers are gunning for bonuses that don’t make much sense.
Rolling budgeting, on the other hand, aligns pay with real business goals rather than historical trends or negotiated standards. That goes a long way toward eliminating the traditional budget gamesmanship “that erodes the ethical foundation,” said Steve Player, director of the Beyond Budgeting Round Table and a guest speaker at the Adaptive Insights’ webinar Tame Your Budgeting Process With Rolling Forecasts.
Stoking internal competition
Such a system also helps employees understand how they’re stacking up against the competition and encourages continuous improvement.
That’s an important point because employee behavior is largely driven by a company’s processes. Therefore, creating positive, realistic goal-setting through continuous planning is critical to maintaining high-achieving, satisfied employees.
“You want to pay people based on the number that’s not negotiable, it’s based on what they actually deliver,” Player said. “And when the environment gets more favorable or less favorable, the target self-adjusts. If it gets more favorable, they’ve got to hit a higher target because everyone else is going higher. So it really focuses you on the competition instead of trying to negotiate a favorable return.”
A rolling forecast solves both sides of the compensation problem caused by traditional budgets. Under such a system, your employees are far less likely to resort to cheating in order to hit what they view as impossible numbers. They also won’t be able to achieve their goal by Labor Day and coast through the fourth quarter.
“You can’t get better behavior until you change the process and start incenting and rewarding and dealing with the things that really matter,” Player said. “The reason we shift to rolling forecasts is because it’s a much more proactive and positive way to run a system.”
Our CFO Indicator Q4 2016 report reveals that while 85% of CFOs say their teams have direct access to the financial and operational data needed to generate accurate reports, it is the non-value-added tasks—like data gathering, verifying accuracy, and formatting reports—that take time away from the strategic analysis desired by top management and other stakeholders. Most CFOs also cite data integration as the biggest technology hurdle to gaining actionable reporting information, given the increasing need to report on both financial and operational data typically housed in disparate, unconnected systems. Read our other CFO Indicator reports here.