Department of Defense

Manage incentives, not just dollars

An organization as large as the US government will never control costs without appropriately aligned incentives for individual employees. The solution to sustained federal cost savings is a shift in focus from management of dollars to management of incentives.

 

Federal employees squander millions of dollars and justifying it by saying, “If we don’t spend it this year, we won’t get it next year.” This causes a ratchet effect on financial plans: employees spend everything they are given because if they don’t, they will get less next year. Requirements go up and down from year to year, varying around a certain average. When spending is below average, they spend the remainder on flat screen TVs and new water coolers so they don’t lose the money next year and get caught short when unpredictable requirements rise. When demands are above average, the organization fights for a larger budget which then becomes the new baseline.

 

I propose a simple solution: give each organization a “savings account.” Rather than receiving a pot of money that must be spent each year, annual funding is deposited into the organization’s savings account to be spent at will – this year, next year, or ten years from now. Leaders will not be forced to waste short-run surplus. They can accumulate money for strategic investment. They will make financial decisions like real people. They will make sure their employees stay at the Motel 6 instead of the Bellagio for the same reason an average American does so: they face tradeoffs with practical consequences.

 

Balances in these accounts would give financial planners an indicator of true resource requirements. If managers could save extra money without immediate threat to next year’s budget, they would be more realistic about how much money is needed. Extra money in a savings account would be added security for the manager as well as an indicator to his or her leaders that the group could likely get by with a smaller annual appropriation.

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Idea No. 6031