With these incentives, each division manager has an incentive to understate (or lie about) how much her division can earn. As a result, the negotiated division budgets need not reflect what managers actually know. Important decisions are then made based on based on budgets constructed from lies.
Fortunately, there is an easy fix:
[by]...changing the way organizations pay people. In particular to stop this highly counterproductive behavior we must stop using budgets or targets in the compensation formulas and promotion systems for employees and managers. This means taking all kinks, discontinuities and non-linearities out of the pay-for-performance profile of each employee and manager. Such purely linear compensation formulas provide no incentives to lie, or to withhold and distort information, or to game the system.
With a linear compensation scheme, there is no incentive to understate how much a division will earn. And with better information, better decisions are made:
I believe that solving the problems could easily result in large productivity and value increases - sometimes as much as 50 to 100% improvements in productivity.