In many companies, this year’s budget is a promise, acquiring added weight from its use in bonus calculations. It is a powerful mechanism to build discipline and accountability.
The same mindset will not work for longer term financial targets. Can you hold someone accountable against assumptions they make for 5 years hence?
Longer term financial targets serve a completely different function to budget numbers. Their purpose is not financial control and accountability. Their purpose is to impact and open up the mindset of managers.
The 5 year target should be impossible to achieve conducting “business as usual”. What is the point of a target that requires no change? At its best, a 5-year target will force new thinking, break limiting assumptions and raise aspirations. Challenge your team – “what would it take to achieve this?” and see where it takes you.
It can be counter-productive to link compensation to this 5-year target, because then you have created an incentive for the organisation to negotiate this number down. If a long-term compensation plan is desired, better to select an arbitrary baseline, like 10% annual earnings growth. The beauty off a simple non-negotiable mechanism is that all of management’s energy can go into working out how to exceed it, not into debating the numbers.
If this year’s budget is a promise, the 5 year number is an inspiring possibility.