I have spent over a decade in the Fortune 500 business environment and at some relatively high levels — therefore I may be considered as an insider. Although my limited experience can’t be assumed as the truth for the entire Fortune 500 population, I will nevertheless offer my perspective and blow my whistle. All other entities innocent until proven guilty.
Executives in the large corporations I have worked for had a high probability of hitting or exceeding their bonus incentives. As you may know, bonuses can be very lucrative in addition to a multiple six figure base income. So how do they have a high probability of hitting or exceeding their bonus target?
First, the Chief Financial Officer (CFO) is himself part of the executive crowd so he has an interest that he and his colleagues get “in the money”. The creation of the annual budget, which is under his or her control, is the mechanism used to determine bonus payouts. If you hit the budget for revenue and profit, executives get 100% of their target bonus. If they exceed the budget, a multiplier is applied such that they can make exponentially more bonus payouts. Conflict of interest? You think.
Second, the Chief Financial Officer reports to the Chief Executive Officer (CEO). As such, the CFO is in an inferior position and must meet the needs and demands of the CEO. In short, although the CFO can recommend budget targets for revenue and profit, it is the CEO that has the final say. Conflict of interest and no power – a problem? You think.
Third, the Board of Directors, which consists of high-ranking business men from other companies, have to approve the budget. The problem here is that they don’t really understand the business or the details of the company’s operations and financials. Sure, they are successful business men or women, but they don’t have a clue about the nuts and bolts of the business at hand. And since they have a vested interest (stock options) in the company exceeding budget and the expectations of Wall Street, they have little incentive to stretch the budget targets.
So, here is how the budget is created in my experience. First, those in the regions or in the field, the folks actually driving the results, receive a revenue and profit target. There is much negotiation that occurs in setting those targets, but in the end, the targets are set. Once these targets are set, the corporate executives often create a “hedge”. For example, those in the field or regions will receive their bonus if they hit $5 billion in revenue and 15% profit off that revenue. Corporate executives will then create a “hedge” for themselves such that their actual revenue target is just $4.5 billion and 10% profit. These softer targets increase their chances to hit their bonus targets. In short, hold those responsible for actually doing the work to tougher targets than they themselves, the Executives, must endure. Of course, when they report goals to Wall Street, they communicate an even less aggressive target than the “hedged” revenue and profit targets they enjoy.
So, the folks responsible for executing the company goals are given aggressive targets to hit their bonus, the Executives give themselves less aggressive targets, and finally, the Executives and Board of Directors give Wall Street even less aggressive targets. Who makes out on this deal? The Executives, the Board of Directors, and Wall Street. Keep in mind that the Board and Executives (stock options) and Wall Street (Stocks) have a vested interest in results exceeding “expectations” that are simply communicated by “management”.
And, think about all the tools Executives have at their disposal during the year to ensure they hit the budget targets. They can lay people off and claim these are “extraordinary expenses” and exclude them from Wall Street expectations and their own bonus calculations. They can find cheaper labor in other countries that will gladly perform mundane activities for a ridiculous hourly rate, they can adjust pricing, they can play with reserve accounts, and so much more. Remember, the external auditors are in their pockets. Remember Enron?
Well, I blew my whistle. More than likely the sound will be unheard like the fall of a noble tree in a dense people-less forest…if such a forest still exists. I fear…and I could be wrong…that this is just the very very very tip of the iceberg. Enjoy your weekend