Every finance chief complains about sandbagging, the practice by which managers lowball their targets and pad their resource requests so they can comfortably beat the plan and defend their turf. The complaint usually carries a note of moral disappointment, as if the managers were being dishonest. They are not being dishonest. They are being rational. The budget is a negotiation in which the number you agree becomes the number that determines your bonus and your reputation, and in any such negotiation the winning move is to distort. The most under-appreciated argument for Beyond Budgeting is not about agility. It is about trust: an organization cannot believe its own numbers as long as those numbers are what people are paid against.
Why gaming is built into the design
Libby and Lindsay (2010), surveying North American budgeting practice, found that firms routinely use the same budget both to motivate people and to evaluate their performance. That dual role is the source of the corruption. If the budget were only a plan, honesty about the future would cost nothing. But because the plan is also the yardstick for reward, every manager has a direct incentive to shape the plan in their favor: set the target low enough to beat, claim more resources than the work requires, and never volunteer that this year could be a good one. The behavior the system punishes as sandbagging is the behavior the system rewards. You cannot design an incentive to distort a number and then be surprised the number is distorted.
The damage is not just soft slack. It is informational. Once everyone knows the budget is a negotiated position rather than an honest estimate, the numbers stop carrying reliable information about what the business can actually do. Leaders end up making decisions on figures they privately discount, applying mental haircuts to every forecast because they know each one was submitted with a thumb on the scale.
Removing the reason to lie
Beyond Budgeting attacks the incentive rather than scolding the behavior. Bourmistrov and Kaarboe (2013), studying two multinationals that replaced fixed budget targets with relative, outside-in targets, showed the shift moving managers out of the budget comfort zone and into a stretch zone of greater engagement with the external environment. Part of what makes a relative target harder to game is that you cannot negotiate it down in a room. It is set by what peers and competitors actually achieve, so lowballing your own submission buys you nothing.
Handelsbanken built its whole system on this insight. Lindsay and Libby (2007) describe how the bank, after abandoning budgets around 1970, judged branches against each other and against rival banks rather than against a negotiated internal plan. With no soft internal target to hide behind, there was no productive way to sandbag, and the numbers a branch reported could be taken more nearly at face value. The relative standard did the disciplinary work while starving the incentive to distort.
The trust dividend, and its limits
The prize is a set of numbers people can believe. Separate the honest forecast from the reward, judge performance against a moving external standard, and the figures managers submit stop being negotiating positions and start being information. In a decade when boards want reliable guidance in a volatile market, a forecast that is not secretly a bid for a lower target is worth a great deal.
The caution is that trust is easily re-lost. Bukh, Ringgaard and Sandalgaard (2024), tracing budgets and forecasts inside one firm, watched the reformed forecast start absorbing budgetary functions the moment it gained weight, at which point people began padding it exactly as they had padded the budget. The lesson is uncomfortable and precise: the corruption does not live in the word budget. It lives in the link between a number and a reward. Attach a bonus to any figure, however you label it, and you have recreated the incentive to lie. The firms that keep their numbers honest are the ones that guard that link with discipline, keeping the figures people are measured against relative and external, and keeping the internal forecast free, unrewarded, and therefore worth believing.
Sources
- Libby, T. & Lindsay, R. M. (2010). Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice. Finds firms use the same budget to motivate and to evaluate, the dual role that makes sandbagging the rational response. https://bpb-us-w2.wpmucdn.com/u.osu.edu/dist/8/36875/files/2016/12/Libby-Lindsay_budgeting_survey-17bvsph.pdf
- Bourmistrov, A. & Kaarboe, K. (2013). From comfort to stretch zones: A field study of two multinational companies applying beyond budgeting ideas. Shows relative outside-in targets, harder to negotiate down, moving managers into greater external engagement. https://doi.org/10.1016/j.mar.2013.04.001
- Lindsay, R. M. & Libby, T. (2007). Svenska Handelsbanken: Controlling a Radically Decentralized Organization without Budgets. Shows peer-and-rival relative accountability leaving no soft internal target to sandbag, so reported numbers can be taken more at face value. https://www.researchgate.net/publication/247875136_Svenska_Handelsbanken_Controlling_a_Radically_Decentralized_Organization_without_Budgets
- Bukh, P. N., Ringgaard, A. & Sandalgaard, N. (2024). Moving beyond Beyond Budgeting: A Case Study of the Dynamic Interrelationships between Budgets and Forecasts. Shows the reformed forecast being padded once it carries reward, locating the corruption in the number-reward link, not the budget label. https://doi.org/10.1080/09638180.2024.2362681