Corporate budgeting is broken, let's fix it

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<title>Corporate budgeting is broken, let's fix it</title>
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<abstract displayLabel="Summary">In a traditional pay-for-performance compensation program, a manager earns a hurdle bonus when performance reaches a certain level. The bonus increases with performance until it hits a maximum cap. To eliminate inducements to game the system, companies should adopt a purely linear pay-for-performance scheme that rewards actual performance, independent of budget targets. A manager receives the same bonus for a given level of performance whether the budget goal happens to be set beneath that level or above it. Severing the link between budgets and bonuses eliminates managers' motivation to lowball targets, and it takes away incentives to move revenues and expenses around when the end of a budget period approaches. Not only does this remove the costs of gaming, it also frees managers from all the time they traditionally had to devote to it</abstract>
<note type="statement of responsibility">by Michael C. Jensen</note>
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<text>November 2001 ; p. 94-101</text>
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