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These sorts of perverse incentives are sadly common in financial situations. You never want to spend less than your full budget lest your budget be reduced next

These sorts of perverse incentives are sadly common in financial situations. You never want to spend less than your full budget lest your budget be reduced next year.

ChuckMcM 3y ago
Exactly, at a previous job I suggested that if someone spent less than their budget the surplus should be added to their budget for the next fiscal year, then managers could plan for big changes, go lean for a couple of years and then have make the changes needed while staying "in budget." I saw an accountant literally roll their eyes at this idea. They explained that any surplus at the end of the year goes into executive bonuses so either use my full budget or give the boss some extra spending cash next year, my choice. Uh yeah, right.
esafak 3y ago
I wonder what the right way to incentivize it is. edit: I meant corporate budgets but thanks for shedding light on the original question.
- konschubert 3y ago
  You price the externality correctly ( here, it would be a higher price on water. ) Then, if you want, you can provide a subsidy in terms of cash payments. That subsidy must not depend on the actual consumption of water. This way, the marginal cost of the resource is correctly priced. See also LVT, CO2 pricing,…
- esafak 3y ago
  To my pleasant surprise, GPT-4 offered decent suggestions: 1. Zero-Based Budgeting: Instead of basing this year's budget on last year's spending, start from 'zero' each year. Evaluate each department's needs freshly. 2. Rolling Budgets: Allow for unspent funds to roll over into the next fiscal year, removing the incentive to spend just for the sake of it. 3. Quarterly Review: Don't allocate for a whole year. Break it into quarters and reassess needs regularly based on changes in environment or strategy. 4. Performance-Based Allocation: Link part of the budget to department performance metrics. Better performance leads to more budget. 5. Flexible Allocation: Have some funds allocated for urgent or emerging needs that arise over the year.
creer 3y ago
Perhaps the right way to manage that is to price our services (as vendors) so as to fit this. Allow building large changes in carefully measured free-standing and justifiable phases.

These sorts of perverse incentives are sadly common in financial situations. You never want to spend less than your full budget lest your budget be reduced next year.

ChuckMcM 3y ago

Exactly, at a previous job I suggested that if someone spent less than their budget the surplus should be added to their budget for the next fiscal year, then managers could plan for big changes, go lean for a couple of years and then have make the changes needed while staying "in budget." I saw an accountant literally roll their eyes at this idea. They explained that any surplus at the end of the year goes into executive bonuses so either use my full budget or give the boss some extra spending cash next year, my choice. Uh yeah, right.

esafak 3y ago

I wonder what the right way to incentivize it is. edit: I meant corporate budgets but thanks for shedding light on the original question.

konschubert 3y ago
You price the externality correctly ( here, it would be a higher price on water. ) Then, if you want, you can provide a subsidy in terms of cash payments. That subsidy must not depend on the actual consumption of water. This way, the marginal cost of the resource is correctly priced. See also LVT, CO2 pricing,…
esafak 3y ago
To my pleasant surprise, GPT-4 offered decent suggestions: 1. Zero-Based Budgeting: Instead of basing this year's budget on last year's spending, start from 'zero' each year. Evaluate each department's needs freshly. 2. Rolling Budgets: Allow for unspent funds to roll over into the next fiscal year, removing the incentive to spend just for the sake of it. 3. Quarterly Review: Don't allocate for a whole year. Break it into quarters and reassess needs regularly based on changes in environment or strategy. 4. Performance-Based Allocation: Link part of the budget to department performance metrics. Better performance leads to more budget. 5. Flexible Allocation: Have some funds allocated for urgent or emerging needs that arise over the year.

creer 3y ago

Perhaps the right way to manage that is to price our services (as vendors) so as to fit this. Allow building large changes in carefully measured free-standing and justifiable phases.