Formula to reward exceeding forecast AND forecasting well

[Adam B]

Was chatting to a colleague about one of the few things I remember from my finance degree.

There was a clever formula to use for managing performance that rewarded actual over forecast but also factors in the accuracy of the forecast, i.e. If you beat a forecast because you deliberately forecast low it would reduce the positive score

If I can't find it on the web - anyone recognise this?

[Behemoth]

Probably MAPE or one of its derivatives. I haven't used or looked at that sort of stuff in a long long time but I'm sure a quick search will help

[anonymous-user]

• There should be a budget at the start of the year agreed between shareholders/board and management. That is the opportunity for shareholders/board to challenge management and make sure the budget isn't "soft".

• Forecast is, from time to time, how the management think they are going to perform relative to that original budget. i.e. at 6 months into a year they will say whether they think they will match, under-perform or over-perform relative to the original budget.

• To make any change to the reward structure part way through a year because the original budget now appears "too easy" is just going to annoy people. It also invites them to come back in any year when they underperform and demand more money on the basis the original budget was "too difficult".

• If you reward people for accurate forecasting you run the risk of having them massage performance downwards.

[Adam B]

Thinking about it IIRC it was set such that

Forecast was compared to original budget
Actual was compared to Forecast

Actual achieving/not achieving forecast - biggest impact
Forecast widely out - reduces positive score

It worked such that getting a high actual result would always trump an accurate forecast, hence no incentive to forecast low and achieve very close to forecast

will google MAPE thanks