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Assignment : budget and balanced scorecards

Category Budget, Motivation
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Assignment : budget and balanced scorecards

Behavioural problems associated with budgets in this firm

Although we can comment upon this firm's budget-related problems based on the Production  Manager's view of the process alone, three things are immediately clear :

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  • The firm's budgetary process is traditional and hierarchical, with departments having separate sub-budgets. In addition, the performance management system appears to be linked to individual performance based on meeting budgetary criteria.
  • There is a significant degree of internal dissatisfaction both about the management accounting system as well as the performance reward criteria.
  • There is also a lack of co-ordination between workers at different levels when it comes to planning their workflow based on the budget at hand – budgeting here is solely a management control system, without any active co-operation from those further down the hierarchy.

The behavioural problems associates with budgets in this firm therefore are:

1. Lack of a 'fixed' nature producing poor motivation  : French (1965) stated that the existence of a fixed budget motivates performance, as workers have a defined goal to work towards. In this firm, the budget of the production department is constantly shifting as a result of changes in the operational goals of its related departments. The production manager is understandably quite upset and de-motivated as he believes his own performance can never be judged on his own, as it is largely dependant on goals set by others. As a result of sales going beyond the projected budget for the company, production budgets are also necessarily shifted, which paradoxically means he is 'overspending' and hence 'underperforming'.  Drucker (1954) also was an advocate of  setting clear, tangible, verifiable, measurable goals in order to motivate, rather than to “control”, people. In this firm, clearly, budget is more of a controlling tool, which is responsible for the poor motivation levels.

    One of the most popular theories of motivation according to Reid (2002) that is relevant to this firm is the expectancy theory, where a worker's motivation to work is affected by a wide range of both independent and interdependent variables (satisfaction associated with the job itself; satisfaction associated with the achievement of objectives; satisfaction with extrinsic rewards associated with the meeting of targets; and the individual’s perceived expectancy of linked reward). Clearly, for our production manager the situation is not conducive at all for staying motivated.

    Stedry (1960) has however argued for different budgets within an organization, for different purposes. While having different budgets for planning and another for motivation can reduce some of the  dissatisfaction in this situation, it has generally been criticized as a bad practice for sending out 'mixed signals' to the workers. Given that this was promulgated long before the era of 'open' participative management, such a solution is inappropriate for all firms at present. Another solution is necessary.

2. Poor participation and pseudo-participation in the budgetary process : The level of participation appears to be extremely poor in this firm too. 'Participation', as defined by Drury (1992) is “the extent to which managers are able to influence the figures that make the budget”. In our study case, the total lack of any participation in the budgetary process has resulted in the situation described as : "Then, as deadlines got tighter and tighter, they just rebelled and relaxed when I wasn’t watching. But I can’t keep watching them all day otherwise who’s going to do the budget?"

  In the case of our production manager, although he is 'supposed to be managing' his departmental budget, in essence he is being forced to pseudo-participate in his company's strategy of using budgets as a management control and performance evaluation tool.  Argyris (1953) found that workers react adversely to budgets where there is pseudo-participation. The hostility that our production manager has encountered from his staff in implementing 'budgets' is largely due to the fact that the workers know very well that their department (production) was the victim of 'pseudo participation' – and they would be forced to work on  progressively tighter schedules over which their 'departmental' manager had absolutely no control.

  As a direct result of this, their department's performance evaluation was always likely to remain 'unsatisfactory', with little prospect of bonuses and rewards.  Hostility and poor motivation was a direct result of these two factors.

Issues of Reward management arising out of the balanced scorecard system

There is little doubt that as a result of changes in the recent decades in the competitive business environment, budgeting is considered by most managers as an outdated 'financial' tool in many respects. As shown in our current study, it is seriously hampering productivity amongst workers by the Production manager's own admission.

  One of the chief benefits of the Balanced Scorecard system, which makes our Production Manager so optimistic about its 'reward management' potential is that it utilizes a host of non-financial measures to evaluate performance. One of the chief advantages of this approach, which is relevant to our example, as cited by Kaplan and Norton (1992) is that by breaking down strategic measures towards lower levels, unit managers, operators, and employees can see what's required at their level to achieve excellent overall performance.

  Balanced Scorecard makes use of all four perspectives that are linked to each other as well as to the strategy of the organisation:

  • Financial perspective
  • Customer perspective
  • Internal Business perspective
  • Learning and Growth perspective

Coming back to the example of our production unit, the fact that for the last few years it has 'silently' provided the infrastructure that has enabled the company to sell well ahead of its projections, has finally got a chance to be 'rewarded'. In the absence of tight departmental budgets, the 'financial' perspective becomes organization wide and not just the function of the sales or finance department.

Since the focus is now companywide, it helps to communicate strategy to individuals and departments, thus reducing much of the dissatisfaction and lack of goal congruence seen with the budgeting system. More importantly for our production manger, it prevents improvements being made in one area at the expense of another. Once the pseudo-participation alluded to earlier gets replaced by a organization-wide participation based on common goals, motivation is likely to improve significantly.

The effects of these changes on the company's reward management policy and structure would be profound.  Performance evaluation would be on the basis of one's effectiveness within the framework of the whole organization, forcing rethinking about the identification of critical success factors for evaluating performance. In addition, performance would be something that the senior managers are expected to develop and encourage among all levels of staff – bringing in a blame-fee culture; as their own effectiveness in managing teams depends on this.

And because the focus of the organization's 'reward policy' in this environment must be to  reward those individuals and departments which provide the best internal  support to its product/marketing strategy,  our production department and its  manager should finally be able to get their true recognition and reward.

The parameters of the balanced sore card system take time to be fully adopted, but provides an excellent opportunity to provide the much-needed re-structuring that the firm needs.


Argyris, C. (1953) Executive Leadership: An Appraisal of a Manager in Action, New York: Harper Brothers.

Drucker, P.F. (1954), The Practice of Management, Harper and Row, New York, NY, .

Drury, C. (1992), Management and Cost Accounting, 3rd ed., Chapman ; Hall, London,

French, J.R.P., Kay, E., Meyer, H. (1965), "Split roles in performance appraisal",  Harvard Business Review, pp.123-9.

R. Kaplan, D. Norton, (1992).The balanced scorecard-measures that drive performance, Harvard Business Review 70 (1)

Reid P (2002) A critical evaluation of the effect of participation in budget target settingon motivation.  Managerial Auditing Journal; Volume: 17   Issue: 3; 2002

Stedry, A.C. (1960), Budget Control and Cost Behaviour, Prentice-Hall, Hemel Hempstead.

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