Question

Emphasize on dysfunctional consequences associated with traditional annual budget (fixed performance budget) in tying managerial rewards to budget performance.

Answer 1

The business history is replete with occasions where in organizations that linked managerial rewards to budgetary performance where in managers have done ethically questionable activities to achieve their targets. Managers have often been found to be indulging in cheating, lying and hiding critical information to close their targets. One of the foremost techniques that managers apply to meet the desired results is by managing earnings. Earnings management refers to  manipulation of earnings to show higher revenues. This involves either deferring of expenses against accounting principles or shifting the timing of economic events to later periods to meet the performance standards. Another technique of budget manipulation involves information bias while preparing the budget. Managers who have been in the system for long know that the top management usually will adjust budgets prepared by the lower management level. The top management will overestimate revenues and contract expenses when rolling out the final budget. So counteract, managers submit budgets which have underestimated revenues or overestimated expenses. Such techniques adopted by the managers to achieve targets ends up in defaming the company and comprise on its integrity and reputation. All in all the extreme pressures put by the management on the managers has had more of negative consequences than positive ones.