FP&A Best Practice Principle 8: Link Financial Incentives to Operational Goals
21 May 2018
This is the eighth of a 12-part blog series appropriately called "The 12 Principles of Best Practice FP&A". These Principles are based on global research conducted with more than 700 organizations worldwide.
Principle 8: The best performing companies also do a better job of holding people accountable for delivering operational results and linking them to financial incentives.
This principle goes back to the theme of operational and financial plans being tightly integrated in the best performing organizations. Accountability isn’t just about hitting the financial targets, it’s also about achieving the operational targets that ultimately drive the financials. Because operational changes drive financial performance, the best performing organizations hold people just as accountable for achieving operational targets as they do the financial ones.
Again, they avoid “blaming” people but instead foster an environment where people feel safe in reporting what happened. It is also important that the operational goals are clearly linked to financial outcomes, in a cause-and-effect linkage. There should be both leading and lagging indicators of performance that ultimately lead to desired financial outcomes.
Take for example a company, let’s call it National Foods, where there is a goal to improve productivity by 5% and where a project was launched to achieve that goal. In this case, the head of manufacturing will have the responsibility for delivering that 5% improvement, but will also make that an annual goal for the Plant Manager and all the people working on the project. In addition, the project leader will also have a goal of delivering the project on-time and on-budget. In turn, she may assign milestone delivery dates to key members of her project team.
These well-coordinated individualized goals will become the basis for annual bonuses, merit increases or other forms of incentives pay to motivate employees.
From a technology perspective, having easy to access and easy to read Dashboards/Scorecards so employees can see how they, their team, and the enterprise as a whole is tracking to meet their goals can be a very important enabler.
In this blog post and the one prior, we discussed the importance of linking incentive programs to achievement of both financial and operational goals. We intentionally addressed them in two separate posts to underscore the need to address both equally, and avoid the common mistake of focusing exclusively on financial targets, without defining how they’ll be achieved operationally.
Looking ahead, the last four Principles are designed to help get FP&A to the next level. If the first eight principles are firmly put in place, FP&A will deliver significant value to the organization as it drives execution and achieve desired business outcomes. These last four principles focus on business drivers and integrating them into FP&A. It’s a more advanced topic, but with the other eight principles firmly in place, the use of drivers can take FP&A (and the organization) to a whole new level.
- FP&A Best Practice Principle #1: Translate Strategy into Actionable Plans
- FP&A Best Practice Principle #2: Identify and Gain Budget Approval for Required Resources
- FP&A Best Practice Principle #3: Connect Operations and the Financials
- FP&A Best Practice Principle #4: Analyze The Variance And Get The Story Behind The Numbers
- FP&A Best Practice Principle #5: Take Action when you fall behind on your Financial or Operational Goals
- FP&A Best Practice Principle #6: Cascade Financial and Operational Goals down to more Specific Targets
- FP&A Best Practice Principle #7: Hold people accountable to reach better financial results and link them to financial incentives
- FP&A Best Practice Principle #9: Identify what drives success in your business and develop measures for those drivers
- FP&A Best Practice Principle #10: Establish short and longer term targets for business drivers
- FP&A Best Practice Principle #11: Develop initiatives and projects to achieve business targets
- FP&A Best Practice Principle #12: Monitor business results and tie them to incentives
- The 12 Principles of Best Practice FP&A: How does it all come together for effective Financial Planning and Analysis