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One issue with rolling forecast is that our company incentive plans are tied to budget (not forecast). Did you encounter a similar situation? How did you address or propose addressing? (Webinar Attendee Question)

This question was asked by an attendee during the Proformative webinar "New Ways of Looking into the Future - Rolling Forecasts" held on December 4, 2012.

A video of the webinar can be viewed here: https://www.proformative.com/resources/webinar-video-new-ways-looking-future-rolling-forecasts

Answers

Topic Expert
Barrett Peterson
Title: Manager, Accounting Standards,
Company: TTX
(Manager, Accounting Standards,, TTX) |

You can retain a (base) "plan ", in addition to the rolling forecast. This might be one of the forecasts.

Rick Odom
Title: Manager, FP&A
Company: Welch Allyn, Inc
(Manager, FP&A, Welch Allyn, Inc) |

We still have the budget for compensation purposes.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

I've tended to discriminate between the two; the budget is a target, and the forecast is more of a living document. You might update the budgets (and comp targets) if things change significantly, but that is to ensure that the appropriate incentives are in place (notably, budgets you can't hit can be very dis-incenting). Beyond that, budgets and related comp should not be a moving target, so per Rick, lock that in.

A corollary is that if budgets and forecasts tend to diverge significantly, then you might consider changing your budgeting timeframe to be within a more predictable range.

A further corollary is that your forecast can help warn you if you are trending significantly away from budget, and may need to revise targets to keep your sales team motivated.

And...

Related topic (not what you asked, but always a consideration) It can be a bad thing to have a budget for targets and a forecast that, created simultaneously, are inexplicably divergent. Telling your salesfolks that they will get their OTC at $x, while believing that they will not, on average, hit that figure, can have negative consequences.

Steve Player
Title: Program Director
Company: Beyond Budgeting Round Table
(Program Director, Beyond Budgeting Round Table) |

In pour work with companies that have moved Beyond Budgeting we follow the BBRT Principle #8 of shifting incentive compensation to rewards with hindsight. Pay is shifted to a relative measure of the value created in whatever the actual environment was. As Keith points out above, any budget can diverge significantly if environmental factors are highly different from what is expected.
This can make the beginning of the year targets either impossible to hit or in some years they are so easy to hit that you reward even the worse performance.

Because of the interest in this area, BBRT will be publishing a lot more information and case examples in 2013.

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