Benchmarks and Guardrails

“Act in the company’s best interest”
“Exercise good judgement”
“Spend company’s money like it’s your own”

These fuzzy guidelines are the typical aggressive course-corrections to old school corporate policies around budgeting (enforcing a rigid spending cap).
As Dan Ruch argues in:
The worst business mantra is “spend the company’s money like it’s your own”
They can easily backfire.

Traditional “max-spend” policies, whether on travel, meals, office supplies or time-off, often come across as tyrannical and bureaucratic. But most importantly, the encourage a “use it or lose it” mentality that’s at odds with everyone’s best interest.

But the alternative, judgement-driven policies are also not without fault:

  1. Ambiguity– the ambiguity in such policies leads to people constantly questioning their choices. Fear, indecision and abuse, are additional likely side effects. When you can’t tell what’s reasonable, choice becomes a burden, and fearing the consequences of every decision that you make is not real freedom. Choices have a biological cost in the form of “decision fatigue” – a negative impact to the quality of decision making, and overall productivity that we would all rather avoid.
  2. Counter-productive under-spending – Whether as an attempt to minimize the chance of unintentionally over-spending (and suffering the consequences as a result),  or due to some people’s natural tendency to frugality, and other psychological biases (like a misguided hero syndrome), counter-productive under-spending in not unlikely. Under-spending on a client dinner, taking a 3-connections flight, or not taking enough time-off can all result in negative implications to the business.

Is there a way to avoid the short-comings of both “max-spend” and “judgement-based” policies?

Dan argues that the answer is “yes”, through designing policies that adhere to these two principles:

  1. Provide benchmarks – use historical data to provide a relevant guideline for “what’s reasonable”. For example: “on average, employees spend $xxx/night, when booking hotels in city X”. Providing an anchoring point for “what’s reasonable” reduces fear and decision fatigue while leaving the door open for varying from the average for a good reason.
  2.  Set minimum guardrails – a “minimum-spend” guideline, can reduce the risk of counter-productive under-spending, without encouraging a “use it or lose it” mentality.
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Benchmarks and Guardrails

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