One of the most surprisingly common behaviours of organisations I’ve witnessed is their lack of ability regarding forward-looking reporting and thinking. I believe this is simply because employees are not incentivised to consider the longer-term value of focusing on this. As a result, there are many missed opportunities, such as failure to maximise returns to shareholders and inaccurate longer term projections.
I believe that many individuals’ incentive plans drive poor decision-making and this fails to deliver the maximum long-term value to an organisation. To accommodate the expectation of a yearly bonus, most companies have in-year employee performance targets. However, this makes employees too focused on their own performance for the year and not the best interests for the business in the long term.
I am not suggesting that we lose the whole notion of personal goals, but there does need to be more balance between employee performance and how it matches team and organisational strategy. This will not be easy to redefine, especially as more and more organisations take on complex project delivery, which can span years rather than months. There’s also the migration to contract-based employment structures and the dwindling tenure of the employee.
Whilst some business areas need to be driven by in-year bonus targets, for example sales, most other areas do not need such a strong emphasis on them. With this in mind, it would therefore make more sense if finance team members were judged on longer term performance incentives to reflect their work initiatives and timescales. For this reason, I think that long-term share options based on share prices are a valuable way to both attract and incentivise employees in these roles.
I have seen instances where managers destroy long-term value in their efforts to meet their in-year performance targets. This typically leads to too much weight on reporting where they are against the in-year targets. Subsequently there is a lack of consideration for critical external factors, such as new market opportunities. As a result, organisations fail to be innovative in their marketplace.
Playing the game
Some managers even design their performance reports and focus their review time on monitoring the achievement of their personal objectives/incentive plans. By simply aligning to the targets people are given, real business value drivers can get overlooked and the plan ends up tracking too many immaterial low value items, i.e. procurement spend by supplier. These reporting demands create a significant burden on the finance function and reduce the time available to add value through business insight activities.
From my experience, organisations frequently accept less profitable business which falls under acceptable return thresholds in order to achieve in-year or quarter revenue targets. Clients – often aware of these targets – will use this knowledge to their advantage in negotiations. The manipulation of leaving a deal to the last day of the financial year or quarter - therefore using other companies’ desperation - is increasingly common and viewed as playing the game. I have rarely witnessed incidents where organisations have played hardball to this and said they’d rather adjust their incentive plans and won’t take the business.
Many businesses do not accept projects which could equal profitable returns because they set internal restraints in their planning process on items such as capital investment, despite lacking cash. Once a target has been set, it is accepted and delivered but nobody goes back to the business to push whether it’s a real constraint or not. If they instead looked at what the maximum long-term value was and the bottom line as a result, they would perhaps act differently.
I think that more time in the planning process could be spent on evaluating external market factors. By analysing the effects (short and long term) of business changes, scenario planning can help organisations make more informed decisions based on relevant information, not purely instinct and with far less fire fighting to contend with.
Alas, old habits die hard. Many of these ‘mistakes’ have become so engrained in organisations’ reporting practices and team strategies that they are often considered the norm or perhaps, not even considered at all. But meanwhile, they will still have to compete with other businesses for work – some of whose initiatives could include forward-looking planning and who I think therefore will have more of a competitive edge.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.