Question
The success of a budget program also depends on whether top management uses the budget to pressure or blame employees. Using budgets to blame employees breeds hostility, tension, and mistrust rather than cooperation and productivity. Unfortunately, the budget is too often used as a pressure device and an excessive emphasis is placed on “meeting the budget” under all circumstances. Rather than being used as a weapon, the budget should be used as a positive instrument to assist in establishing goals, measuring operating results, and isolating areas that need attention. The budgeting process is also influenced by the fact that bonuses are often based on meeting and exceeding budgets. Typically, no bonus is paid unless the budget is met. The bonus often increases when the budget target is exceeded, but the bonus is usually capped out at some level. For obvious reasons, managers who have such a bonus plan or whose performance is evaluated based on meeting budget targets usually prefer to be evaluated based on highly achievable budgets. Moreover, highly achievable budgets may help build a manager’s confidence and generate greater commitment to the budget while also reducing the likelihood that a manager will engage in undesirable behavior at the end of budgetary periods to secure bonus compensation. So, while some experts argue that budget targets should be very challenging and should require managers to stretch to meet their goals, in practice, most companies set their budget targets at “highly achievable” levels.
Discuss what you think would be a good way to eliminate some of the behavioral aspects of tying compensation to budgets. Discuss what incentives you would provide that would lead to the setting of more accurate or realistic budgets by those involved.
Asked By EnchantedForest78 at
Answered By Expert
Reginald
Expert · 2.6k answers · 2k people helped
Step 1/2
Budgeting
Budgeting stands as a foundational process within financial management, assuming a pivotal role in the organization's financial endeavors by facilitating planning, oversight, and assessment. It entails the methodical distribution of resources, encompassing both monetary and non-monetary assets, with the aim of attaining specific objectives. In essence, the essence of budgeting lies in organizations establishing objectives for revenue, costs, and investments for a defined period, usually spanning a fiscal year. These objectives function as a guiding framework, directing decisions related to finances and resource allotment. Budgets encompass diverse facets of an organization's operations, covering predictions of income, operational expenditures, capital investments, and even non-financial metrics like production quantities, sales targets, or measures of customer satisfaction.
Explanation:
Simply, budgeting is a multifaceted process that encompasses planning, resource allocation, control, and evaluation. It is an indispensable tool for organizations of all sizes and sectors, enabling them to set strategic goals, manage their financial resources effectively, and achieve sustainable growth and success.
Step 2/2
Eliminating some of the behavioral aspects of tying compensation to budgets can be achieved by implementing a balanced and thoughtful approach that encourages responsible budgeting and fosters a positive work environment. Here are some strategies and incentives that can help:
Long-Term Performance Metrics : Shift the focus from short-term budgetary targets to longer-term performance metrics. Instead of solely rewarding budget adherence, consider evaluating managers based on multi-year financial performance, customer satisfaction, employee engagement, and other key performance indicators (KPIs). This encourages a more holistic view of performance.
Relative Performance Comparison : Rather than absolute budget targets, compare a manager's performance to industry benchmarks or peer group performance. This can help set more realistic expectations and reduce the pressure to meet overly aggressive budgets.
Incentives for Transparent Reporting: Encourage open and honest reporting of financial data, even if it means admitting budget variances. Reward managers who provide accurate and timely information about challenges and opportunities, fostering a culture of transparency and problem-solving.
Performance Bonuses Tied to Broader Goals : Offer performance bonuses that are tied to achieving strategic objectives and organizational goals rather than just budget targets. This ensures that managers prioritize the overall success of the organization over simply meeting financial targets.
Risk Sharing : Consider implementing risk-sharing mechanisms where both the company and managers share in the outcomes. This could involve profit-sharing arrangements or deferred bonuses that are paid out based on sustained long-term performance.
Training and Education: Invest in training and education for managers to enhance their budgeting and financial management skills. This can help them set more accurate and realistic budgets from the start.
Regular Budget Review and Adjustments : Encourage a dynamic budgeting process that allows for regular reviews and adjustments throughout the year. This flexibility can help adapt to changing circumstances and reduce the pressure to "game" the budget at year-end.
Focus on Non-Financial Rewards: Besides financial incentives, recognize and reward managers for non-financial contributions, such as innovation, teamwork, and leadership, which contribute to the organization's success.
Peer Recognition : Create a system for peer recognition where colleagues acknowledge each other's contributions to achieving budget and performance goals, fostering a collaborative atmosphere.
Ethical and Compliance Training : Emphasize the importance of ethical behavior and compliance with budgeting and reporting standards. Encourage adherence to professional codes of conduct.
By implementing these strategies and incentives, organizations can reduce the negative behavioral aspects associated with budget-based compensation while promoting more accurate and realistic budgeting practices that align with the organization's long-term success.
Explanation:
Above are the some of the suggestion to improve to set realistic more achievable targets while preparing the budgets. It is also necessary to set more realistic goals to ensure effective functioning of organization.
Final Answer
The incentives to se more accurate or realistic budgets are given in step 2.
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