In our last post we introduced you to Step # 4 of the Seven Step Compensation Diet – the need to control the headcount and type of jobs in your organization.  Reward dollars can be maximized by operating a lean organization.  Only staff those jobs required for operational success.  At the same time avoid back door cost increases by refusing to play “title games” that add expense without providing a fair performance “return.”

Success here depends on your ability to track reward dollars and measure your spend against a plan.  To do that you need to have an allowance.

Step # 5: Have a Budget and Stick to it

Have you ever played the board game Monopoly?  Players start with a given pile of money and then it’s spend, spend, spend and hope for the best.  When it’s not your own money it’s fun to see what you can do, because it’s only a game, right?

When Managers have the Keys to the Kingdom though, the authority to spend the company’s money, it’s a different matter.  Your company probably doesn’t look at management spend on employees in quite the same manner as a wheedle-dealing board game.  The costs are real; the implications long lasting.  As management considers effective methods to rein in uncontrolled spending (cutting the fat), they should set up some form of restrictions to which managers must adhere.  No more strolling past Go and Collect another $200.  Thus the budget is born.

An established annual reward budget (pool of money) can be an effective gatekeeper and measurement tool for managers, limiting their largesse and forcing better decision-making.  On a regular basis they can also track the level of spend, as well as the corresponding progress toward adherence to an annual goal.  The basic tenet here: making a series of one-off decisions over time without having a cost meter running will drain your financial resources before your annual needs are met.

Chances are, you can’t go back for more money.

When under pressure Managers are notorious for first reluctantly agreeing to trim their merit spend (note the nodding heads and muted voices of support), only to circle back later with promotions, adjustments and job re-evaluations that more than replace the initial savings.  It is this form of passive resistance and end-around tactics that a fixed budget is designed to defeat.  If you factor in that Managers will always attempt to circumvent whatever system you put in place, you might be able to stay one step ahead.

So save yourself some angst by ensuring that your budget pool includes promotions and adjustments, as well as the annual merit increases.   Some use two separate budgets to better categorize and track activities.  But whatever the case, be careful to limit and track.

By the way, those granted the authority to spend the company’s money should be held accountable as to how that money is spent.  You can measure it.  Adherence to a spending plan should become an assessment factor in a managers personal performance appraisal, an objective indicator of the demonstrated ability to actually manage.

Finally, to ensure that you achieve greater management focus, ensure that the Finance function regularly monitors and reports on those activities (management spend decisions) that impact budget targets.  Managers who know how much money they have, and how much remains, are more careful with it.

If no one is watching, no one is caring.  It is not easy to become a lean organization, and even harder to stay there.