Participatory Issues in Budget and Its Motivational Impact
Introduction
A popular American management guru Theodore Levitt said, “If you don’t know where you are going, any road will take you there.” (Johnson, 1992) This is a great way to illustrate the importance of the characteristics which are chosen for the setting of targets within an organization.
Targets affect performance by directing attention, mobilizing effort, increasing persistence, and motivating strategy development. (Locke et al, 1981) Bearing this in mind, one might hold the belief that if an employee is participating in the setting of goals of the organization in which they work than they would be more motivated to achieve them and thus it would be more probable that the organization in question would meet its goals.
It has been found using the Maslow, equity and expectancy theories of motivation that the effect of participation on budget target setting is situation specific and that there is no perfect budgeting system. (Reid, 2002) Another study resulted in a conclusion along similar lines. By testing the hypothesis that motivation mediates the effect of participation on performance, the researchers found that participation and performance are positively related.
This essay will begin with a literature review of targets, participation and motivation, followed by a critical evaluation of its empirical findings, theoretical development and methodology used.
Literature review
Targets & Participation
The area of participation in target setting is very complex and diversified. The element of participation in setting targets is of significant importance in today’s corporate world and it is expected that this will continue in the future. There are various studies undertaken in this field to discover its’ various implications in terms of behaviour, commitment, motivation and so on.
Lau and Roopnarain (2014) suggest that performance measurement systems (e.g. Balanced Scorecard) affect employee behaviour through intervening variables such as role ambiguity (Burney & Widener, 2007; Hall, 2008), procedural fairness (Lau, Wong & Eggleton, 2008) and feedback (Hartmann & Slapnicar, 2009). These three variables highlight the process through which targets are set. The most famous debate regarding this process is the setting of “top-down” targets or “bottom-up” targets. There is a lot of evidence showing that (Macintosh, 1995) “top-down” targets have a negative effect upon employees’ motivation in either participating in the target setting process or accomplishing individual and organizational targets. On the other hand, Reid (2002) pointed out that participative management could be “politically correct” considering the disadvantages of “top-down” targets currently. Its’ value may be situation-specific because it can be extremely difficult for all types of organizations to adopt the participative-formed system.
Some research suggests that even if the employees received an unfavourable or tedious budget they would still show positive attitude and would be committed to achieve it but only if the participation was supreme while formulating it (Manger et al, 1995). Recipients of unfavourable budgets would perceive it as a favoured outcome if they feel a fair procedure was employed. The most frequently considered fair procedure is often the opportunity to express one’s view (participation) during decision making (Folger, 1977).
Other research has contrasting views, for instance, a high budget emphasis in a superior’s evaluative style was correlated with subordinate’s job-related tension (JRT) (Hopwood, 1972), but in contrast Oatley (1978) found the opposite view. Reconciling these views, Brownell (1982) argues that a high (low) budgetary participation would lead to a high (low) level of budget emphasis with enhanced managerial performance.
Participation & Motivation
Building on the discussion above, it seems like participation in target setting is a complex process from an organization perspective. Shields and Shields (1998) indicated that there are two meta-reasons for the existence of participative budgeting: information sharing and coordinating interdependence, and individual motivation and attitude. Shields and Shields (1998) stated that researchers should delineate a map between models explaining organizational and individual perspective within a participative budget.
From an organizational perspective, Chong (2002) pointed out that budget participation exerts a budget goal commitment effect on the employees which triggers an informational effect on highly committed employees who will contribute greater effort to gather, exchange, and disseminate job-relevant information to enhance their job performance.
From an individual perspective, Reid (2002) concluded that participation is seen as a way of increasing motivation by getting the staff to “own” the targets and link themselves to the targets. It can also be explained from the motivational mechanism perspective (Locke and Schweiger, 1979) that participation may lead to employees’ increased trust and sense of control, more ego involvement, increased identification with the organization, the setting of higher goals, and increased goal acceptance. These factors presumably result in increased performance, as opposed to when there are no such opportunities for participation (Brownell, 1982).
Researchers (e.g., Vallerand 1997; Ryan and Deci 2000; Gagné and Deci 2005; Wong-On-Wing, 2010) assert that the stated reasons of individuals for participation in target setting indicate the underlying motivation for that behaviour which has inspired recent research proposals and tests of the motivation-based model of participation in budgeting (Wong-On-Wing, 2010).
Wong-On-Wing (2010) attempts to integrate the foregoing reasons or participation in budgeting within a general motivation-based framework (see Figure 1). First, central to the model is intrinsic motivation, autonomous extrinsic motivation, and controlled extrinsic motivation for participation in budgeting. Wong-On-Wing (2010) distinguished that individuals are intrinsically motivated to participate because they view their participation as an end in itself. On the other hand, extrinsic motivation is viewed as a means to an end. Second, on the left-hand side, it included the antecedents of motivation for participation in budgeting, which are individual variable as organizational commitment and situational variable as environmental dynamism. Third, on the right-hand side, Wong-On-Wing (2010) linked motivation with participation in budgeting and performance which are the consequences of individuals’ behaviours.
Following Wong-On-Wing’s (2010) framework, Lau & Roopnarain (2014) go one step further and explore what specific form of motivation has the more significant impact on employee job performance. One such study evaluated the effects of intrinsic and extrinsic forms of motivation in the participation of target setting as well as the effect of financial and nonfinancial measures. Extrinsic motivation through nonfinancial measures proved to be the only form of motivation that had a significant impact on employee job performance. This is due to the fact that this form of motivation is controlled by the organization as a means to achieve better performance. The results of this study provided the business community with important insights into the intricacies by which performance measures influence employee motivation to participate in target setting and job performance. Another idea for utilizing targets in an effort to create more motivation among employees is to have different budgets for different purposes, because no one budget can meet the demands of every need within an organization (Stedry, 1960). This idea would go along with the previously mentioned findings of Reid (2002). However, this idea was proposed during a time that had a vastly different reporting environment from the one we are living in today.
Crucial to this process is the contrast between targets that motivate and targets that attempt to control employees. One researcher advocated the use of setting clear, tangible, verifiable, measurable goals in order to motivate, rather than to “control” people. (Drucker, 1954)
Summary of Empirical Findings
One view was the positive association between participation in target setting and increased commitment towards goals (Mahfud Sholihin et al, 2010). From a practical view, within the design of a performance evaluation system, commitment is enhanced when the participation in goal setting plays a significant role. If the opportunity to get engaged and influence the process of target setting is provided it may increase employee’s feeling of contribution towards decision-making and ultimately enhance their commitment.
Brownell and Dunk (1991), found more concrete support for this view, concluding that Brownell (1982) it holds only under condition of low task uncertainty. Contrastingly, in high task uncertainty, participation serves a prime information exchange role even if uncorrelated with the budget emphasis.
Contrary to the above discussion, Hirst (1987) found no impact on overall job performance from interaction between budget participation and emphasis because participation has a feeble positive impact on performance, regardless of budgetary emphasis.
One more dimension in this area is to examine job-relevant information(JRI) as an intervening variable between participation and budget (Kren，1992). It was observed that participation eases JRI acquisitions and ultimately is correlated with refined performance. Participation also provided information to clarify the association between formal rewards and budget, which is another information role for participation (Brownell and McInnes, 1986). Chong (2002) provided empirical support for the dual effects on the goal commitment of participative budgeting and informational effects of budget participation on job performance which is important since prior studies have recognized the dual roles of budget participation but failed to empirically test the dual effects.
As for motivation, Wong-On-Wing (2010) tested this model using a survey conducted among managers of an international bank. The result suggested that intrinsic motivation and autonomous extrinsic motivation for participation in budgeting are positively related to performance while controlled extrinsic motivation is negative (see Figure 2). In prior research, researchers do not differentiate among different types of motivation (Covaleski et al. 2003) which is important since Wong-On-Wing (2010) proved that different forms of motivation have been shown to lead to different consequences. Also, the finding of a differential effect indicated the need for further research on the various forms of motivation for participation in target setting. Second, the proposed model applied an integration of research on the antecedents and consequences of participation in target setting within a theoretically based framework of motivation. Third, from a practice perspective, Wong-On-Wing (2010) analysed individual participants’ motivations, which may differ from the organizational perspective of top management. This could be an independent variable when analysing the information role of performance measurement systems (e.g. Balanced Scorecard).
Theoretical Development
As an important link in corporate control, targets are popularly adopted in organizations (Locke and Latham, 2004). Early studies on target-setting theory, dating back forty years, were based on acknowledgement that conscious goals affect action, pointed out by Ryan in 1970 (Locke and Latham, 2002). A large number of papers written between approximately 1980 and today covered different topics relating to target-setting, such as target efficiency, personal goals, satisfaction and practical applications. Locke & Latham (2002) classifies this structure. Goal commitment, feedback and target complexity were discussed to achieve goal efficiency. Two other aspects (personal goals and satisfaction) combined human resource management with management control, studying motivation and incentives with target-setting. Motivation theory (intrinsic and extrinsic motivation for employee participation, Shields & Shields, 1998; Wong-On-Wing et al, 2010) as well as self-determination theory (Gagné and Deci, 2005) are two examples in recent development.
However, some limitations inherent in these studies still need to be noted. Chong & Chong (2002) argued that there was an absence of antecedents of budget participations when considering its consequences. In addition, they pointed out one problem with empirical evidence from past papers: using different theories from the psychology field, the results were mixed and conflicting. For example, Brownell and Mclnnes (1986) found there is a significant relationship between participation and performance. Unexpectedly, the cause-effect path is weakness, meaning “the expectancy model shows that there seems to be a weak relationship between effort and performance.” However, other literatures examine the existence of a positive relationship.
In Wong-On-Wing’s study (2010), the scales set for measuring motivation were built on the reasons for participation in target setting which was concluded from prior research in this area. In that case, the three scales do not fully capture all variables explaining the motivations in participative target setting. For instance, autonomous extrinsic motivation was only linked to goal setting and controlled extrinsic motivation was only examined as an information role.
Methodology Analysis
Much of the literature reviewed in this paper used a common method in the participation, performance measurement and motivation fields – Survey (questionnaire). Then different statistic systems or computer programs were applied to test the hypothesis or the model they made in order to get the empirical result. Although the basic idea is widely used, the diversity of samples chosen and data collected still contributes to different conclusions. In order to get more details to compare a sample was selected by top level managers Brownell and Mclnnes (1986) from three companies (two in electronics industry; one in the steel industry) consisting of 224 middle-level managers in each company. Their criteria focused on control cost and should be accounted in the performance of managers which is quite different from future literatures’ survey criteria. There are three variables measured by the questionnaire, budget participation, motivation and performance. Using Milani’s (1975) six-item, seven-point likert-type scale to measure budget participation is widely accepted method. Employee performance was measured using Mahoney, Jerdee & Carrol (1965)’s self-rating instrument. The method of measurement of budget participation used was the same as Chong and Chong (2002). As for the performance part, they introduced Mahoney et al. (1965)-eight dimensions of performance rating as flows “planning, investigating, coordinating, evaluating, supervising, staffing, negotiating, and representing.”
Chong and Chong (2002) using another theory-goal setting to examine the link between budget participation and budget commitment and job preference. They choose 80 cross-section manufacturing companies from Australia, then sent the questionnaire to 120 middle-level managers. Finally, 79 responses are usable. The sample criteria mainly focus on the participants themselves (working experience in the related area). Their measurement model consisted of three factors: job-relevant information, budget goal commitment, budget participation. Then, they developed two theoretical models to test the causal relationship around these three factors. To determine the best-fit model, the Sequential Chi-square difference tests (SCDTs) were used. Lastly, they analyzed the squared multiple correlation of this two-equivalent model and the strength of the standardized parameter coefficients to support their conclusion.
101 managers were selected from one company-a large international bank in Hong Kong. The criteria were quite open, the participants ages ranged from 26 to 55. But all the managers were required to attend a training seminar before the questionnaire (Wong-On-Wing, Guo and Lui 2010).
However, the sample selected by Lau and Roopnarain (2014) was slightly different from other empirical researches. Their survey questionnaires were sent to the operating level employees, not the middle-level managers. 149 useable responses were received and pre-tested by a two-sample independent t-test to avoid bias. They only consider two factors -financial measures and non-financial measures. Lau & Moser (2008) developed a nine-item instrument that was used to measure performance.
Critical Evaluation and Suggestion
The research we reviewed shared one limitation, the characteristic of survey. First, the bias in data could not have been avoided due to the complex and indirect method used to measure the variables. For example, although the self-rating instrument is broadly used to measure the performance, it may be overactive and subjective (Parker et al., 1959; Prien and Liske, 1962; and Heneman, 1974; Thornton 1980). In addition, the size of the sample is small. Looking at the survey below, one was drawn from one bank while others were from Australian manufacturing industries. Thus the results gained from the sample may not be generalizable to small organizations and nonmanufacturing sectors. Even though the participants were selected from cross-line industries, the useable data is too small. As Boomsma and Hoogland (2001) found, there may be non-convergence problems and improper solutions when the samples are of 200 or fewer cases.
Secondly, the survey methodology is not able to conclude cause-effect relationships. One of the reasons for this is they may ignore the premise of budget participation (Shields and Young 1993; Shields and Shields 1998). The other reason is the variables they considered to be measured are too limited. Any other independent and mediating variables were missed in the research. As Chong and Chong (2002) mentioned, they only examined the informational role of budget participation without including other informational aspects. Shields and Shields (1998) recommended that in the future, research should consider premises such as task uncertainty, environmental uncertainty and information asymmetry relating to budgetary participation (Dunk 1993; Shields and Young 1993; Chong 1996; Shields and Shields 1998). With this wider consideration, it would give a more comprehensive and meaningful view of the dual role of budget participation and motivation.
Focusing on the statement by Drury 2015, various researchers have validated that the motivational influence of targets is possible when characteristics and the process of targets are taken into consideration. Various characteristics like budget clarity, participation, feedback, evaluation and attainability are considered to form a decent budget (Kenis, 1979). These characteristic elements should be adjusted favouring the ability, nature and skills of employees. After framing targets comes the role of motivational impact. Most evidence suggests that if the target is favourable, especially when a fair procedure of participation is incorporated, motivation plays a big role, which enhances performance. (Argyris, 1952). This boost in performance is evident when employees participate and subsequently feel that their work is significant to the organisation.
There is room for suggestion on this concept. There has been a lot of research regarding success factors of budgetary participation, factors incremental to budgetary motivation, but still further investigation is required on what adverse moderator factors or circumstances the relationship hinders. Furthermore, much literature still demands prudent research on antecedent of participation (Mahfud Sholihin, 2010; Chong & Chong 2002). Also research is required on the degree of applicability of this relationship in non-manufacturing units as their end outcome is intangible and researchers should survey all the industrial sectors like the manufacturing sector.
Reference
1. Boomsma, A., & Hoogland, J. J. 2001. The robustness of LISREL modeling revisited. Structural equation models: Present and future. A Festschrift in honor of Karl Jöreskog, 2(3), 139-168.
2. Brownell, P. 1982. The role of accounting data in performance evaluation, budgetary participation, and organizational effectiveness. Journal of Accounting Research 2001, 12–27.
3. Brownell, P. 1986. Budgetary Participation, Motivation, and Managerial Performance. The Accounting Review, 61(4).
4. Brownell. P, Dunk A.S. 1991. Task uncertainty and its interaction with budgetary participation and budget emphasis: some methodological issues and empirical investigation. Accounting organization and society, 693-703.
5. Burney, L., & Widener, S. 2007. Strategic performance measurement systems, job relevant information and managerial behavioral responses: role stress and performance. Behavioral Research in Accounting, 19,43–69.
6. Chong. V.K. 1996. Management accounting systems. task uncertainty and managerial performance: A research note. Accounting. Organizations and Society, 415-421.
7. Chong, V.K. and Chong, K.M. 2002. Budget goal commitment and informational effects of budget participation on performance: A structural equation modeling approach, Behavioral Research in Accounting, 14(1), 65–86.
8. Covaleski, M., J. Evans III, J. Luft, and M. Shields. 2003. Budgeting research: Three theoretical perspectives and criteria for elective integration. Journal of Management Accounting Research, 15, 3–49.
9. Drucker, P.F., 1954. The Practice of Management. 1st ed. New York, NY: Harper and Row.
10. Dunk. A.S. 1993. The effect of budget emphasis and information asymmetry on the relation between budgetary participation and slack. The Accounting Review, 400-410.
11. Gagné, M., and E. 2005. Self-determination theory and work motivation. Journal of Organizational Behavior, 26, 331–362.
12. Heneman, H. G., 1974. “Comparisons of Self and Superior Ratings of Managerial Performance,” Journal of Applied Psychology, 638-642.
13. Hirst. M.K, 1987. Some further evidence on the effect of budget use and budget participation on managerial performance. Australian journal of management, 49-56.
14. Hall, M. 2008. The effect of comprehensive performance measurement systems on role clarity, psychological empowerment and managerial performance. Accounting, Organizations and Society, 33, 141–163.
15. Hartmann, F., & Slapnicar, S. 2009. How formal performance evaluation affects trust between superior and subordinate managers. Accounting, Organizations and Society, 34, 722–737.
16. Hopwood A.G, 1972. An empirical study of the role of accounting data in performance evaluation. Journal of accounting research, 156-182.
17. Johnson, T., 1992. Relevance Regained: From Top-Down Control to Bottom-up Empowerment. 1st ed. New York, NY: Free Press.
18. Kenis, I, 1979. Effects of Budgetary Goal Characteristics on Managerial Attitudes and Performance, The Accounting Review, 707-721.
19. Kren L, 1992. Budgetary participation and managerial performance: the impact of information and environmental volatility. The accounting review, 511-526.
20. Lau, C. 2014. The effects of nonfinancial and financial measures on employee motivation to participate in target setting. The British Accounting Review, 46.
21. Lau, C. M., & Moser, A. 2008. Behavioral effects of nonfinancial performance measures: the role of procedural fairness. Behavioral Research in Accounting.
22. Lau, C.M. and Roopnarain, K. 2014 ‘The effects of nonfinancial and financial measures on employee motivation to participate in target setting’, The British Accounting Review, 46(3), 228–247.
23. Lau, C. M., Wong, K. M., & Eggleton, I. R. (2008). Fairness of performance evaluation procedures and job satisfaction: the role of outcome-based and non-outcome-based effects. Accounting and Business Research, 38(2), 121–135.
24. Locke, E. and D. M. Schweiger. 1979. Participation in decision-making: One more look. In Research in Organizational Behavior, Vol. 1, edited by Staw, B., 265–339. Greenwich, CT: JAI Press.
25. Locke, E. 1981. Goal setting and task performance. Psychological Bulletin, 90(1).
26. Locke. E.A, Latham. G.P. 2002. Building a Practically Useful Theory of Goal Setting and Task Motivation: A 35-Year Odyssey, American Psychologist, 705-717.
27. Locke, E. A., & Latham, G. P. 2004. What should we do about motivation theory? Six recommendations for the twenty-first century. Academy of management review, 29(3), 388-403.
28. Lau, C. M., & Moser, A. 2008. Behavioral effects of nonfinancial performance measures: the role of procedural fairness. Behavioral Research in Accounting, 20(2), 55–71.
29. Ryan, R., and E. L. 2000a. Intrinsic and extrinsic motivations: Classic definitions and new directions. Contemporary Educational Psychology, 25, 54–67.
30. Macintosh, N.B. (1995), Management Accounting and Control Systems, John Wiley, Chichester.
31. Mahoney, T.A., Jerdee, T.H. and Carroll, S.J. 1965. The job(s) of management, Industrial Relations, 4(2), 97–110.
32. Magner. N, Welker B.W, 1995. The interactive effect of budgetary participation and budget favorability on attitudes towards budgetary decision makers: a research note. Accounting organization and society, 611-618.
33. Milani, K. 1975. The Relationship of Participation in Budget-Setting to Industrial Supervisor Performance and Attitudes: A Field Study. The Accounting Review, 50(2), 274-284.
34. Parker, J. W., E. K. Taylor, R. S. Barrett, and L. Martens, “Rating Scale Content: III. Relationships Between Supervisory- and Self-Ratings,” Personnel Psychology (Spring 1959), 49-63.
35. Prien, E. P., and R. E. Liske, 1962. Assessments of Higher-Level Personnel: III. A Comparative Analysis of Supervisor Ratings and Incumbent Self-Ratings of Job Performance, Personnel Psychology, 187-194.
36. Stedry, A. 1960. Budget control and cost behavior. 1st ed. Prentice Hall.
37. Shields, M.D. and S. M. Young. 1993. Antecedents and consequences of participative budgeting: Evidence on the effects of asymmetrical information. Journal of Management Accounting Research, 265-280.
38. Shields, J. F., and M. D. Shields. 1998. Antecedents of participative budgeting. Accounting, Organizations and Society, 23: 49–76.
39. Sholihin. M, et.al, 2010. Goal setting participation and goal commitment: examining the mediating roles of procedural fairness and interpersonal trust in a UK financial services organization. The British accounting review, 135-146.
40. Thornton, G. C., 1980. Psychometric Properties of Self-Appraisals of Job Performance, Personnel Psychology, 263-271.
41. Vallerand, R. J. 1997. Toward a hierarchical model of intrinsic and extrinsic motivation. In Advances in Experimental Social Psychology, 29, 271–360. San Diego, CA: Academic Press.
42. Wong-On-Wing, B., Guo, L., & Lui, G. 2010. Intrinsic and extrinsic motivation and participation in budgeting: antecedents and consequences. Behavioral Research in Accounting, 22,133–153.