Unexpected Advice for Budget Cuts

Budget cuts arrive like a storm, and the advice that follows is always the same: prioritize ruthlessly, find savings, get creative. But these platitudes miss the deeper truth. Budget cuts don’t just reveal where resources are strained—they reveal how leaders think, plan, and, most importantly, what we reward.

Let’s consider Mal and Alice. Both lead projects, both submit budgets. Alice does the hard work of optimizing her plan, requesting only what’s necessary to meet the deliverable. Mal, on the other hand, pads his budget. He adds a little extra here, inflates estimates there—just in case.

When the cuts hit, something curious happens. Mal calmly announces he can “make it work” with 40% less. He’s praised for his flexibility and team spirit. Alice, who has no fat to trim, pushes back. She’s seen as inflexible, perhaps even a liability. Mal is celebrated as the hero. But stop and think: If Mal can cut 40% and still deliver, why didn’t he plan that way from the start?

What’s being rewarded here? Efficiency? Honesty? Or the ability to game the system?

The Padding Dilemma

The Mal and Alice scenario isn’t just a quirk of budgeting—it’s the natural outcome of how incentives are structured. Padding budgets, whether intentional or subconscious, is a survival tactic in many organizations. If leaders expect everyone to pad, they apply cuts indiscriminately. And when those cuts come, those who inflated their numbers are seen as adaptable, while the honest are left defending themselves. It’s a corporate prisoner’s dilemma:

• If everyone pads, inefficiency reigns, but the game protects individual players.
• If no one pads, resources are allocated fairly, but trust is fragile—one bad actor can break the system.

This cycle doesn’t just waste resources; it corrodes trust and rewards behavior that ultimately undermines the organization.

What to Do When Cuts Hit

Now let’s imagine you’re Alice. You’ve done the work to budget honestly. You didn’t pad; you planned carefully. And now the cuts have arrived. What should you do?

1. Acknowledge the Shift: Cuts mean priorities have changed. The original deliverable is no longer valued at its full cost. Fighting this reality wastes time. Instead, focus on adapting.
2. Negotiate a New Deliverable: Work with stakeholders to redefine success under the new constraints:
3. Avoid the Sunk-Cost Trap: If the original project is no longer feasible, find a way to exit gracefully:
4. Communicate the Trade-Offs: Be transparent about what the cuts mean. If features are dropped or timelines extended, make it clear what’s gained and lost. Build trust by being honest about the impact.

For Founders, Executives, and VCs: What Are You Rewarding?

The bigger question isn’t what to do when cuts arrive—it’s what to do before they happen. If Mal and Alice are typical players in your organization, ask yourself: What behavior are we encouraging?

1. Are we rewarding honesty? If leaders like Alice are penalized for budgeting carefully while Mal is celebrated for “finding” savings, the system incentivizes padding. Efficiency and trust are sacrificed for politics.
2. Are we aligning resources with priorities? Cuts should reflect deliberate shifts in what the company values, not blanket reductions. If every team gets the same percentage cut, are we truly allocating resources where they’re most needed?
3. Are we communicating clearly? Budgeting works best when leaders at every level understand the company’s priorities and trust that honesty won’t be punished. Without this foundation, padding becomes the default.

Breaking the Cycle

To break the cycle of padding, leaders must model and reward fiscal responsibility:

• Celebrate Optimized Budgets: Reward leaders who plan efficiently and deliver, even if they can’t perform miracles after cuts.
• Encourage Transparency: Make it safe for teams to submit honest budgets by cutting thoughtfully and sparingly, not reflexively.
• Reassess Continuously: Treat budgeting as an iterative process. Regularly align resources with shifting priorities instead of reacting in crisis mode.

Final Thought: Clarity Through Cuts

Budget cuts reveal more than just resource constraints. They expose how organizations think about planning, incentives, and trust. Are you rewarding the Mals of the world—the ones who inflate, protect, and pivot with ease—or the Alices, who deliver honestly and consistently?

The companies that thrive in uncertain times are the ones that value cooperation over competition, transparency over gamesmanship, and strategy over survival tactics. When cuts come, it’s not just about prioritizing ruthlessly—it’s about leading wisely.