Accounting Best Practices, Fifth Edition

5–10. Link to Performance Measurements and Rewards

A continuing frustration for senior managers is to see an immense amount of time being put into the formation of the annual budget, only to have employees completely ignore it over the ensuing year. Some wonder why they bother with the budget at all. A common result is little or no management support for the annual budgeting process.

To resolve this problem, tightly link the budget and employee reward systems. By doing so, employees are forced to peruse the budget continually to ensure that their actual performance matches the standard laid down by senior management at the start of the year—if not, then their next pay raise and bonus may not arrive, or be much smaller than expected. At worst, they may find themselves looking for employment elsewhere. To make this best practice work, the human resources staff should be brought in at the end of the budgeting process to devise a set of reward mechanisms that directly link employee pay to attaining the budget. For example, if a revenue budget requires sales of $1 million per salesperson, there should be a hefty bonus for the sales staff associated with attaining that goal. Similarly, if an automation project is scheduled for completion in July, at a cost of $500,000 and an immediate reduction of 11 direct labor personnel, the engineering manager should be tied to a bonus that is paid out only if all of these budgeted items are attained. This should be a very clear-cut document that ...