Budgets and Performance Compensation
“You didn’t make your budget, so there’s not going to be any bonus this year.” Or: “If you exceed your budget by 20 percent%, you will receive twice your normal bonus.”
Statements like these reverberate through “mahogany row” as companies come to grips with the difficult issue of rewarding their executive cadre. The top managers of these companies know that before performance can be rewarded, it must first be measured. Therefore, they frequently seize on the company’s already established budgeting process as the yardstick by which some people will receive a lot, others a little, and still others nothing. Interestingly, they do this notwithstanding that at other times, and perhaps even on the very same day, they are holding their sides and rolling on the floor after first viewing the ludicrous budget figures submitted by their operating unit managers.
The purpose of this chapter is to view the budget as a tool for measuring and rewarding executive performance. Its uses and abuses are explored first concerning the area of short-term incentive compensation plans and, later, longer-term incentive plans. Short-term incentives are aimed at rewarding performance in a single fiscal year whereas longer-term incentives (e.g., stock options) are geared toward rewarding performance over a series of years.
MEASURES OF EXECUTIVE PERFORMANCE
By definition, incentive plans are supposed to “incent” something. ...