The most reliable way to corrupt a budget is to pay people for hitting it. The moment a bonus depends on beating a negotiated target, every manager acquires a second job alongside the real one: talk the target down during budget season, and manage the result so it lands just above the line. Sandbagging the forecast, spending the full allocation so it is not cut next year, deferring good news to a leaner quarter, all become rational. The document meant to allocate resources efficiently becomes a negotiation over how easy the coming year will be. The problem is not that the people are dishonest. It is that the incentive rewards the game.
Fixing this by negotiating harder is a treadmill. As long as pay is tied to the number, both sides have reason to distort it. The exit is to decouple the two. Decoupling does not mean removing rewards; it means the reward stops depending on a number the person being rewarded helped negotiate.
The game the budget creates
The dual use of the budget is where the trouble starts. Libby and Lindsay (2010) found that budgets remain widely used for both motivation and performance evaluation, which is precisely the combination that generates gaming: when the same number that plans the year also determines the reward, the incentive to distort the plan is baked in. A budget used only to coordinate resources can be honest. A budget used to grade and pay people cannot, because honesty about capacity now costs the person being honest.
Beyond Budgeting adopters tend to break this link deliberately. Matějka, Merchant and O'Grady (2021), comparing 80 adopters with 121 non-adopters, found that adopters rely on relative targets and weaker individual incentives. Weakening the individual incentive is not softness; it removes the reason to game the target in the first place. If the annual number does not set your bonus, there is nothing to be gained by negotiating it down.
Rewards that don't distort
Cutting the pay-to-budget link raises an obvious worry: if the number does not drive the reward, what does? The evidence points toward broad, shared, group-based rewards rather than individual targets, and toward rewards that do not sit on top of intrinsically motivating work as a lever.
The motivation research is a caution against the reflex to attach cash to every target. Deci, Koestner and Ryan (1999), synthesizing 128 experiments, found that tangible performance-contingent rewards significantly undermined intrinsic motivation. Bolting a bonus onto work that people would otherwise care about can crowd out the caring. That does not make sharing the gains wrong; it makes narrow, individual, number-hitting bonuses the wrong instrument.
Shared reward, by contrast, holds up well when it is paired with real voice. The meta-regression by Doucouliagos, Laroche, Kruse and Stanley (2020) found profit sharing on average positively associated with productivity, and strongest where it was combined with employee participation in decisions. Blasi, Freeman and Kruse (2016) found that group incentives, broad ownership, profit sharing, options, reduce voluntary turnover and improve returns when combined with employee voice and a positive culture, while group incentive on its own tends to suffer from free-riding. The gain comes from the package: share the results and share the decisions.
Semco built exactly that package, and made the accounting transparent so the shared reward was credible. As Semler has told it, each unit paid a fixed slice of its profit, around a quarter, to the people who produced it, with the books open so anyone could check the math. The side effect was people turning off lights, because the money was now theirs. His phrase for it was that "nobody hoards a pizza": when the reward is a genuine share of a common result, and everyone can see the result, there is nothing to game and no target to sandbag. The link that corrupts the budget, my bonus depends on this negotiated number, simply does not exist.
That is the decoupling in full. Stop paying people to hit a number they negotiate, and the budget stops being a game. Share the real results broadly, tie them to real voice, and keep the books open, and reward starts pulling in the same direction as the work instead of against it. The negotiation was never the problem to be won. It was the problem to be removed.
Sources
- Libby & Lindsay (2010). Beyond budgeting or budgeting reconsidered? Budgets are widely used for both motivation and performance evaluation, the combination that drives gaming. https://bpb-us-w2.wpmucdn.com/u.osu.edu/dist/8/36875/files/2016/12/Libby-Lindsay_budgeting_survey-17bvsph.pdf
- Matějka, Merchant & O'Grady (2021). An Empirical Investigation of Beyond Budgeting Practices (80 adopters vs 121 non-adopters). Adopters use relative targets and weaker individual incentives, reducing the reason to game the number. https://doi.org/10.2308/JMAR-19-010
- Deci, Koestner & Ryan (1999). A meta-analytic review of extrinsic rewards on intrinsic motivation (128 experiments). Tangible performance-contingent rewards significantly undermined intrinsic motivation. https://doi.org/10.1037/0033-2909.125.6.627
- Doucouliagos, Laroche, Kruse & Stanley (2020). Is Profit Sharing Productive? A Meta-Regression Analysis. Profit sharing is on average positively associated with productivity, strongest when combined with employee participation in decisions. https://onlinelibrary.wiley.com/doi/abs/10.1111/bjir.12483
- Blasi, Freeman & Kruse (2016). Do Broad-based Employee Ownership, Profit Sharing and Stock Options Help the Best Firms Do Even Better? Group incentives reduce turnover and lift returns when combined with voice and culture; group incentive alone suffers free-riding. https://onlinelibrary.wiley.com/doi/abs/10.1111/bjir.12135