Winning - Jack Welch [68]
The budgeting system that I’m talking about is linked to the strategic planning process described in the last chapter, in that it is focused on two questions:
How can we beat last year’s performance?
What is our competition doing, and how can we beat them?
If you focus on these two questions, the budgeting process becomes a wide-ranging, anything-goes dialogue between the field and headquarters about opportunities and obstacles in the real world. Through these discussions, both sides of the table jointly come up with a growth scenario that is not negotiated or imposed and cannot really be called a budget at all. It is an operating plan for the next year, filled with aspiration, primarily directional, and containing numbers that are mutually understood to be targets, or put another way, numbers that could be called “best efforts.”
Unlike a conventional budget, with its numbers cast in concrete, an operating plan can change as conditions change. A division or business can have two or three operating plans over the course of a year, adjusted as needed through realistic dialogue about business challenges. Such flexibility frees an organization from the shackles of a budget document that has become irrelevant—or even downright dead—because of changing market circumstances.
At this point, you might be thinking, “Yeah, yeah, this approach sounds great, but what about my bonus?”
That’s a good question. It’s the key question, in fact. And the answer is that this operating plan process can occur under only one condition:
Compensation for individuals and businesses is not linked to performance against budget. It is linked primarily to performance against the prior year and against the competition, and takes real strategic opportunities and obstacles into account.
For many companies, this condition would involve a radical change. People have been trained for years and years to hit their budget numbers no matter what, and managers have rigidly rewarded those who did and punished those who didn’t, no matter what.
That was the company I grew up in for twenty years, and largely the company that I inherited when I became CEO. Over the years, I was at the receiving end of plenty of Phony Smile meetings, and participated in dozens if not hundreds of Negotiated Settlement meetings on both sides of the table.
But as GE’s culture became more infused with candor, transforming its budgeting process became more realistic. Eventually, we were able to move our businesses away from budgets with rock-hard targets and toward operating plans filled with stretch goals.*
That transformation took time—several years, at least. Along the way, I promoted the change as often as I could.
In 1995, for instance, Appliances was having a brutal go of it. Competitors were churning out high-quality products at very low prices, and our team was struggling like crazy to catch up. They were innovating with several new product introductions of their own and improving manufacturing processes, getting more productive by the day. Still, at the end of the year, their earnings were 10 percent below internal expectations and about flat with the previous year.
At the same time, Plastics was having a great year. Their market took off, and shortages of material quickly developed, making it a seller’s market when it came to pricing. Their earnings jumped 25 percent, about ten points higher than the operating plan called for.
Back in the old budgeting days, Plastics would have gotten the big bonuses and Appliances would have gotten a lump of coal. But with the new approach, both businesses got increased payouts that were about equal in amount.
At our annual management meeting that year with five hundred