Guest post from Brad Burnaman, Cognos SPM Industry Solutions Executive, IBM Business Analytics
Follow Brad on Twitter: @BradBurnaman
Have you heard the one about Harvard, the economy and a spreadsheet?
It might sound like a joke, but it was reported that the spreadsheet, created by two Harvard economists, Kenneth Rogoff and Carmen Reinhart, was used by federal lawmakers as the baseline for planning the recovery effort that the United States undertook in the aftermath of the so called "great recession."
Economists and legislators leaned on this document to model the way that the global economy would react to different forms of stimulus. There was only one catch -- the spreadsheet had a small error in one of the foundational calculations.
This tiny but meaningful error has brought the macroeconomic model built in the spreadsheet into question. It highlights a problem that is all too common in the world of business, particularly in my area of interest – incentive compensation.
In the field of incentive compensation, minor spreadsheet errors can result in majorly wrong payments issued to employees. Error rates in spreadsheets are also hard to find and can be extremely expensive.
Recent Gartner studies have shown that companies who use spreadsheets for their incentive compensation calculations can experience overpayments between two and eight percent of the overall incentive compensation payout. For a company with a $40 million compensation program, that could mean $800,000 on the low end, up to $3.2 million on the upper end!
Incentive compensation management provides a much better solution than spreadsheets. First, it greatly reduces the chances of introducing unintended errors. In the same Gartner study, it was also found that companies with incentive compensation management in place reduce their likelihood of compensation errors by 90 percent. In our previous example of the $40 million compensation program, that would mean savings of between $720,000 and $2.88 million.
That number alone justifies taking a hard look at what solution is in place for incentive compensation in your company.
Spreadsheets are powerful tools and have their place, but as the economic model gone wrong demonstrates, even two of the brightest minds in our country can become victim (and the punch line) of the silent, insidious spreadsheet errors that can slip in and go unnoticed.
For more information: