Question

The budgetary process can impact employee performance in both positive and negative ways. What are some of the potential impacts of the budgeting process of employees, their attitudes, and their actions? As a manager, how can you minimize negative impacts on performance?

Answer 1

The budgetary process can impact employee performance in both positive and negative ways. Following are some of the potential impacts of the budgeting process of employees, their attitudes, and their actions:

• Dysfunctional Behaviour:

  Budgets can bring positive behaviour among the people when the goals of individual employees are found in conformity with the goals of the organisation. The employees who participate in the budget making process may feel happy in producing the maximum output and contibute towards organisational goals.

  Such a budget may induce and motivate others to bring excellence in their performance. But sometimes, due to improper implementation of the budget and unrealistic management expectations, the reaction of employees are found to be negative, which in turn has adverse impact on achieving the organisational goals. Such a negative behaviour is known as dysfunctional behaviour which is de­fined as an individual behaviour that is in basic conflict with the goals of the organisation.

• Excessive Pressure Created by Budgets:

  Budgets are used in to direct control and coor­dinate all activities in the organisation. In this task, budgets should not generate excessive pressure and stress on the people working in the organisation. In order to eliminate undesirable pressure, the budget goals and standards should be set which are neither too high (tight) nor too low (loose). If the standards and the budgeted goals are too high, motivation becomes poor and failing to achieve them may frustrate the managers and in turn, this frustration can result into poorer performance.

  Similarly, if the goals and standards are too easily achieved, a manager may lose interest and his performance may decline. As goals and standards are tightened (but not made too tight), motivation will increase.

• Top Management Support:

  The attainment of budget goals and standards at the lower level management depends to a large extent on the support, participation and cooperation extended by top management in the preparation and execution of budgets. Top managers by their actions should create an environment and give impression to the employees about their commitment and support to the budget goals and objectives. Otherwise, the planning and control function will be damaged in case employees will be dissatisfied or under motivated.

  In order to create and promote a reasonable degree of positive behaviour among the people in an organisation, and to minimise negative impacts on performance, the a budgeting system should possess the following important features or elements:

• ​​​​​​​Participative Budgeting /Employee Participation - Participative budgeting increases employee initiative, performance and morale. This budget­ing communicates a sense of responsibility to employees and fosters creativity. Such budgeting process often gives top management a better grasp of the problems their employees face and provides the employees a better understanding of the dilemmas that the top management deals with.

• Monetary and non-monetary incentives. - The increased responsibility and challenge inherent in the (participative budgeting) process provide non-monetary incentives that lead to a higher level of performance.Individuals involved in setting their own stand­ards will work harder to achieve them.

• Realistic standards -Top management must actively review and approve budgets and follow-up on budget variances. also set some realistic standard which can be acheived and establish clearly delineated lines of authority and responsibility.

• Flexible budgeting capabilities.

• Frequent feedback on performance.