Oh that’s easy. They don’t do it because it would require the number crunchers up top to actually understand what is happening down below. Or care, for that matter.

The formula is to drive profits. That is all. A certain level manager might get a reward for coming in under budget, but their budget is going to get reconfigured.

The reasoning is different for different types of companies. But for a for profit company, every dollar spent requires a significant amount of effort to earn it. I worked in distribution for almost ten years, so this is my experience. Target gross margin on sales was 20 percent. So for every 100 dollars sold, 20 is profit. But that doesn’t take into account the cost to produce it. You’ve got to pay someone to source material, pay someone to take orders, pay someone to ship it, pay supervisors, warehouses, pay rent, cleaners, energy…etc. at the end of the year, we contributed like 2-3 cents on the dollar in NET profit. So for 1000000 in sales, 20-30,000 in net profit.

If you’re able to reduce 4 different departments budgets by 5000 each, you can double your net profit with the same sales. That’s a SIGNIFICANT motivation for the branches management to cut budgets. Because they DO get management incentives on that net contribution.