BEHAVIOURAL ASPECTS OF BUDGETING
When looking at budgets the major factor to consider is how they can be used to get employees to work as hard as they possibly can towards the objectives of the company. Budgets affect motivation and how people behave. There are four main areas to consider:
1) How difficult? The manager needs to consider an appropriate level of difficulty in which to set targets. Make the targets too easy and employees will feel little incentive to work harder; they will be able to obtain the target with little effort. Make the targets too difficult and employees will become de-motivated and even give up if asked to tackle an impossible task. The ideal target should be seen as achievable and yet remain just out of the worker’s reach. This ideal target can be compared to that of a greyhound and a hare; the hare runs a little faster than the dogs so that they eagerly chase it all the way to the finish without actually catching it.
2) Participation in budget setting. Secondly, the manager needs to consider how much input employees should have in setting their own targets.
There are a few benefits of allowing employees to set their own targets, motivation being the most influential; Individuals are more likely to feel more committed to targets they have set themselves. In addition, by being involved in the process of target-setting, employees are able to discover more about the organisation’s needs and objectives, subsequently improving the firm’s communication. Employees’ specialist knowledge is also vital for setting budgets.
There are of course drawbacks of allowing employee participation in the target setting process. Firstly, the whole process can be time consuming; employees are required to think about and then to set and discuss their own objectives. There is then the problem of conflicting objectives. For example, an employee may be tempted to set an easy target for themselves so as to ensure a hefty bonus or just an easy life. The wrong targets could also be set by junior members of the firm who may prepare budgets without the organisation’s objectives in mind. On the other hand, an inexperienced manager may be over-optimistic concerning their predictions for the following year. One way to control these problems of budgetary bias is by reviewing the budget’s assumptions to eliminate any bias.
Another pitfall to avoid is that of pseudo-participation. This is an instance of how participation can go wrong if not properly carried out, often arising when an organisation pays lip service to the idea but does not follow through. You may be asked by your manager to set your targets for the year and yet head office’s targets produced a month or so later bear no resemblance to your plans. It is likely that you will then feel de-motivated because the chances are that you spent considerable time analysing the resources available and your working conditions, prior to a day-long presentation of your plans to senior management.
Finally, participation needs to actually fit in with the culture of the company. For example, the delegation of target-setting would seem out of character in an organisation where control is pivotal.
3) The third aspect to consider is how important a role achieving budget plays in evaluation; Hopwood considered three different management styles:
- Budget constrained. The emphasis of achieving budget can lean towards the short-term and therefore create more stress and confrontation. A specific risk of this style is that any expenditure which may possibly lead to a benefit in the long-term, such as training costs will be sacrificed to meet the budget.
- Profit conscious. This style aims at more of a long-term view, and so budget is not considered the be all and end all, evaluation being against the long-term company objectives.
- Non-accounting. More emphasis is placed on non-financial indicators rather than evaluating people on the basis of accounting data such as costs or profit. For example, a company with a reputation for customer satisfaction may look at customer complaints towards the manager.
4) When to use what? We must finally consider when is best to apply these theories. The ‘Contingency Theory’ argues that the circumstances of the business should instigate the right approach. What should be considered is the culture of the organisation, the environment in which it functions, its size etc. There is no golden rule for deciding when to use budgeting to get the optimal performance out of a workforce, but rather to find the approach that best suits your organisation. |
