A reasonably progressive budgeting model will include a direct link into the corporate bonus plan, with staff being paid bonuses based on their achievement of certain goals. Though the intention is good — to create incentives to achieve the budget — it actually tends to create more problems than it solves.
One problem is that, if employees realize that they will fall short of their bonus targets, they will be more likely to hoard their resources or possible sales for the next period, when they will have a better opportunity to achieve better performance and be paid a bonus. The result is wild swings in corporate performance from period to period as employees cycle through the hoard-to-splurge cycle.
Another problem is that, if the bonus target cannot be attained by normal means, employees will stretch or break the accounting rules in a variety of ways to achieve the target. By doing so, a low level of ethics is introduced into the company, while also likely saddling the company with a variety of accounting problems that must be addressed in future periods.
The solution is to link the budget to a sliding performance scale that contains no “hard” performance goals. The best example of the sliding bonus scale is what it is NOT — there are no specific goals at which the bonus target suddenly increases in size. Instead, the bonus is a constant percentage of the goal, such as 1% of sales or 5% of net after-tax profits. Also, there should be no upper boundary to the sliding scale, which would present employees with the disincentive to stop performing once they have reached a maximum bonus level. Similarly, there should theoretically be no lower limit to the bonus either, though it is more common to see a baseline level that is derived from the corporate breakeven point, on the grounds that employees must at least ensure that the company does not lose money. The sliding scale approach also makes it much easier to budget for the bonus expense at various activity levels, rather than trying to budget for the more common all-or-nothing bonus payment.