Big Four & Leading Accounting and Consulting Firms – news, opinion and career opportunities for aspiring & current professionals & alumni

The Conflict Between ‘Actual To Budget’ Controls And ‘Budget-based Compensation Targets’

By Richard Cornelisse, Big4.com Guest Blogger

In one of my blogs on my personal website, I took the position that the tax profession evolves from an individual sport to a team sport. It is no longer possible to excel in everything re global tax management. Due to all technological developments it is already part of our present and future. A tax technical advice has to be implemented in systems, processes and controls. Instructions have to be given to people outside the tax function.  Alignment with the business is key for the tax function to plan in time and avoid future firefighting. That means that certain people excel in certain areas of tax and the outcome of the overall team effort will make the real difference from a quality standard perspective.

If teaming is part of a company’s business objective, the company’s “informal” culture or budget-based compensation targets can be the bottleneck to realize such teaming.

Is it good to have Stevie Wonder in the driver seat?

“A Ferrari is a beautiful, very fast and a state of the art car, but we should not put Stevie Wonder in the driver seat. He is an excellent song writer and performer but he never ever will be the next Michael Schumacher. It will be risky business if he controls the throttle” Richard Cornelisse

The above might be considered a ridiculous example, but strangely enough happens often in our daily practice. The downturn might even make it worse.

Why?

It is because of budget-based incentive targets. Everybody feels now the pressure and the focus is on making personal budget first. We might know the best driver, understand that he is the best option, but that does not mean we want Michael actually in the driver seat. It does not matter if Michael works for the same company or that it is in the best interest of the client. Stevie, wants to make his own comfort zone first. It is in his personal interest.

  • Should we be surprised? 
  • Is this not part of our human nature? 
  • Is that not the reason why we have our company culture? 

Exactly, the reason why proactive management of common values is needed.

“In a profession that sells a promise of performance versus a tangible product or service, a firm’s vision, values, and culture lie at the heart of that promise. Vision is where the firm is headed. Values are the behaviors the firm holds important, and culture is the feel, the energy, the society within the organization. Collectively, they form the core around which the business is built.”  Maureen Broderick

Budget to actual exercises

Before I continue, I consider budget exercises still a necessity, especially for large organizations that need to manage the performance of a lot of people. The budget process provides top management some level of control.  Actual to budget exercises are and will remain an important part of people’s performance targets.

It is more about being aware of the pitfalls and its impact. After the budget is set, manipulation of the internal environment to make budget – at all costs – might results in disconnect and internal competition. Such behavior is in my view in conflict with the company’s business strategy such as growth, increase market share or market leadership.

One of the reasons could be that the personal performance -meeting budget-based incentive targets- is considered of a higher priority than the company’s own business objectives.  If this is something structural it becomes the company’s “informal” culture and result in:

  1. power struggle over clients (protectionism, claiming clients and wins)
  2. own “people first” attitude (no best team approach)
  3. service offerings proposed that are actually outside the own area of expertise (no standard quality, increased liability, pricing variation)
  4. lack of willingness to share relevant client related information (protectionism)

Budget-based compensation targets might also themselves create an incentive to underperform even in times of growth. Substantially exceeding budget could give discussions about how much the budget has been sandbagged last year with the result you getting higher targets next year. To avoid this, positive results might be carried forward to next year.

Jack Welch’s view

Jack Welch has his own view about budgeting.  He considers it number crunching and a waste of time that could be used in a more productive way. It is all about internal politics and time could be used better by focusing on the external environment: the customer.

What is the amount of time spent on budgeting?

The Beyond Budgeting Round Table, an industry research organization, estimates that the average corporation spends four months and 20-30% of senior executives’ and financial managers’ time on the budget.

“Making a budget is an exercise in minimization. You’re always getting the lowest out of people, because everyone is negotiating to get the lowest number”

” The budgeting process at most companies has to be the most ineffective practice in management. It sucks the energy, time, fun and big dreams out of an organization. It hides opportunity and stunts growth. In fact when companies win, in most cases it is despite their budgets, not because of them” Jack Welch

I like and admire Jack Welch and this kind of statements.

Budgeting a waste of time

Jack Welch’s complaint was that he was being sandbagged in the planning process itself.  Waste of productive time starts during setting the budget.  It is all about managing an internal conflict. The aim of the leadership is to get the budget as high as possible, the manager has an opposite strategy: “negotiation to the lowest”. That is the side effect of budget-based incentive targets.

Such a behavior – “passionately defending modest projections of mediocre performance” – conflicts with business objectives, when the company’s mission statement is to increase its market share and/or maintain or achieve market leadership. Is that not strange?

Jack Welch’s hope was not a better way to negotiate budgets, but an end to the negotiation. However, is it likely that managers propose themselves aggressive goals? If not, does the company’s culture have to change?

Assume that the company’s business plan was to grow with 15% overall and one of the business units exceeds and realizes 25% growth.  The budget is made. What does that say about the responsible manager? Did he do a good job? Should he earn a big bonus? That all depends. If you focus internally only a confirmative yes is the obvious answer. However, it could simply be underperforming when the growth is the cause effect of unexpected increase of demand in the market (external factors).  The same is applicable if competition shows much higher growth figures.

In an ideal world everybody knows how competition is performing, how the teams are set up and what the client portfolio is.  The own strength and weaknesses have been analyzed and measured ongoing. A gap analysis is made with competition and the gaps found can be prioritized and validated with top management. The impact of these gaps on the company’s overall business objectives are discussed. For the various solutions cost benefit analysis are made, so a constructive discussion with top management can be held about what is needed to close these gaps.

In the worse case the gap(s) will not be closed, but at least you have achieved mutual awareness and hopefully responsibility.

The above example is not only applicable for external advisers, but this method could be used by in-house (indirect) tax functions during their budget negotiation (about external spending) and/or getting extra resources.

The strength of this approach is that you look forward and focus on what still can be managed.  Budget to actual is a ‘look back’ exercise.

Maybe the best of two worlds is the winning combination.  Life is often about a good compromise.

How do you see this all?

Richard’s other Big4 publications

Richard Cornelisse is CEO of the KEY Group and worked previously as Big4 Partner in the Tax Performance Advisory and Indirect Tax Practice and blogs on Tax Function Effectiveness and Tax Control Framework developments.


Share this post:

Comments are closed.