The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.NEW YORK ( TheStreet) -- It's October -- the season for Halloween, football . . . and budgeting. Many executives dread October. They consider it a wasted month as they move from meeting to meeting, playing games to reduce next year's quota. They accuse others of sandbagging as they manipulate their own forecasts. The script for these games is relatively straightforward -- each participant claims that next year's business environment will be unusually difficult and, if quotas are not lowered, the company will lose its sales force. Participants routinely prepare volumes of biased data in the same way a politician uses half-truths to intentionally deceive. At a large U.S. telecom, the top enterprise Sales Center vice president (of 45 Sales Centers) is masterful at budgeting. He attributes 50% of his success to October negotiations. He uses a two-step process. First, he finds creative ways to transfer slow growth accounts to his peers. Then, he spins convincing stories about precarious business conditions in his customer organizations. Every year he is able to negotiate a quota that peers consider a low hurdle. And, virtually every year, his sales center exceeds quota. Follow TheStreet on Twitter and become a fan on Facebook. Not only does such behavior create cynicism, but inaccurate forecasts can be very harmful to the company as a system. Another sales center vice president at the same telecom company was a top 10% performer. In the last two weeks of every quarter he would tell the business unit president that success was unlikely. The president passed this forecast to the CEO who used it to prepare analysts. Yet, each quarter the VP "magically" closed deals in the final hours to exceed quota. After several warnings and despite excellent revenue performance, the president fired him. Dishonest forecasts created havoc across the company -- and made his managers look foolish. Why do respected executives practice such deceptiveness? Because it works. Consistently exceeding quota produces outsized incentives and promotional opportunities. Realigning the budgeting system with company interests is actually quite simple. The problem is not the budgeting process itself. The problem is that we couple incentive pay with forecasting.
Most incentive plans begin paying out at a given threshold; let's say at 75% of quota. If you do not deliver 75% of quota, you receive no incentive pay. From 75% to 100% the formula pays $x for every $y of revenue. After reaching 100% of quota, the plan may accelerate to two times. At 110% of quota, the accelerator may move to three times or more. Lowering quota increases personal wealth. In a 2001, Harvard Business Review article, Michael Jensen called this, "Paying people to lie."
Years ago in graduate school, I read a fascinating study that found that the most successful criminal organizations had the highest levels of integrity. Makes sense. If I promise to pay you $10,000 to make a hit and then I don't pay up, there will be chaos. Whether in gangs or in corporations, successful organizations must maintain systems of integrity.