Are your long term financial targets forcing innovation?

Your strategic financial targets can be tool to release innovation if you treat them differently to budget targets.

In many companies, this year’s budget is a promise, acquiring added weight from its use in bonus calculations. It is a powerful mechanism to build discipline and accountability.

The same mindset will not work for longer term financial targets. Can you hold someone accountable against assumptions they make for 5 years hence?

Longer term financial targets serve a completely different function to budget numbers. Their purpose is not financial control and accountability. Their purpose is to impact and open up the mindset of managers.

The 5 year target should be impossible to achieve conducting “business as usual”. What is the point of a target that requires no change? At its best, a 5-year target will force new thinking, break limiting assumptions and raise aspirations. Challenge your team - “what would it take to achieve this?” and see where it takes you.

It can be counter-productive to link compensation to this 5-year target, because then you have created an incentive for the organisation to negotiate this number down. If a long-term compensation plan is desired, better to select an arbitrary baseline, like 10% annual earnings growth. The beauty off a simple non-negotiable mechanism is that all of management’s energy can go into working out how to exceed it, not into debating the numbers.

If this year’s budget is a promise, the 5 year number is an inspiring possibility.