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Your Company Will Never Be Agile: Budgets and Bonuses

This article is the second part of the series Your Company Will Never Be Agile. The previous part is Organizational Structure Prevents Companies from Becoming Agile.

Imagine you are a manager in a company that has annual budgets and bonus systems. A team that you are responsible for wants to work in a truly agile fashion (self-organized, re-planning every 2 weeks, working with emerging requirements, ...). Do you allow them to do it? Under which conditions do you allow them to?

Bonus Systems

People with targets and jobs dependent upon meeting them will probably meet the targets – even if they have to destroy the enterprise to do it.

--W. Edwards Deming

If your company has a "traditional" bonus system, you (the manager or the employee) will get a monetary bonus if you meet some targets (based on Key Performance Indicators - KPIs) in the current budgeting cycle. You probably also risk being fired if you do not meet your targets a few times in a row.

So you have to make sure to control every aspect that might influence the KPIs your targets depend upon. In a hierarchical organization, you basically have three possibilities: Either you tell your subordinates directly what to do, you choose their KPIs and targets in a way that they positively influence yours, or you do both (Be careful if you choose the third option: You might create a percieved conflict of interest for your subordinates - between their targets and what you have said).

With your bonus and your job depending on meeting some targets annually, you cannot allow your teams to work in a truly self-organized way. You cannot allow them to re-plan every 2 weeks. You cannot allow them to work with emerging requirements (which make the end-result unpredictable). You would lose some control over your targets. You cannot let them work in an agile way.

But what if you chose all the KPIs in your company based on continuous improvement? Then you, as a manager, would still get your bonus and keep your job, as long as all your subordinates improve continuously. Sounds good, but you probably still don't want to risk it: Your subordinates might not meet their targets, and then your bonus is gone too... So, some managers will still stick to micro-management.

Annual Budgets

When your company does annual budgeting, they need to plan ahead for at least a year - probably longer. This will be an impediment to agility. It means there are things that you cannot do in the next year, because they were not accounted for in the budget.

You will prominently notice this in the last weeks of the budgeting cycle, when managers will either:

  • Throw money out of the window because there is some budget left. They will send people to trainings, buy stuff, ...
  • Push back on everything that might cost money, because the budget is almost gone. You want to hire another member for your development team? You want to buy a team license for the profiler you need? Not now, mabe in March...

The annual budget will prevent teams, departments and the whole company from reacting quickly to changes in circumstances. It will prevent the company from achieving true business agility.

Especially in combination with targets: When the bonus or the job of some of your managers depends on the company hitting the budget, they will push very hard not to implement any changes that would cause the company to miss the target. Even if those changes are necessary for the company to remain profitable in the long run.

Projects

Most of the work that companies organize as projects today should probably not be projects at all. Most of the work should be organized as a continuous stream of value creation.

Projects create problems because they have an allocated time-frame, a budget and a plan how to achieve the project's goals (there are even more problem with projects - refer to the link above for more information). The problem here is that, within the time-frame, you are not free to change direction, otherwise the project would be challenged.

To Recap...

Annual budgets, bonus systems based on KPIs / targets and projects create incentives for some people in your organization to prevent (or delay) changes (and you cannot find the right set of KPIs to prevent this). When some people in your organization delay or prevent necessary changes, your organization is not agile.

So, in order to become truly agile, your organization has to find a way to perform well without annual budgets and bonus systems, and mostly without projects.

My name is David Tanzer and I have been working as an independent software consultant since 2006. I help my clients to develop software right and to develop the right software by providing training, coaching and consultanting for teams and individuals.

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