Influencing Budgeting And Their Implications On Performance And Behavior

3| Factors Influencing Budgeting and Their Implications on Performance and Behavior

3.1. Contract Type

The type of employment contract an employee receives influences his behavior and performance. Companies frequently use budget-based contracts, where the final compensation is linked to whether the employee attains a budget goal. In some contracts, there is additional compensation when the budget goal is outperformed. There has been a lot of prior research about the influence of budget-based contracts, both on individual and on group performance.

Bonner, Hastie, Sprinkle & Young, (2000) review several laboratory experiments on financial incentives. They find that financial incentives improve individual task performance, although only in 50

Probably the most famous term in this area is participatory budgeting. In participatory budgeting, a special emphasis is put on the vertical communication channel between a superior and his subordinate(s). The subordinate who is affected by the budget actively participates in the budget creation process. This method is often used by superiors to elicit private information from the subordinates, which they normally would not share with the superior. When this information is shared, it can benefit the subordinate but also the whole organization (Nouri & Parker, 1998).

In their research paper, Nouri & Parker (1998) discover that budget participation positively affects job performance. However, the relationship is not direct but mediated through budget adequacy and organizational commitment which both have a positive relationship with job performance. Thus, through budget participation, not only job performance is indirectly boosted. In fact, budget participation improves budget adequacy, which in turn increases planning quality, as well as organizational commitment is positively affected which increases

It is impossible to determine a universal solution for budgeting problems since the budgeting process is influenced by many factors that differ among entities. The paper points out that in theory budgeting is a powerful tool. In practice, however, it is complicated to properly implement and maintain a budgeting system that adequately serves all needs. The previous section highlights two approaches that are used in practice, the “Activity-Based Budgeting Approach” and the “Beyond Budgeting Approach”. While the first approach’s aim is to improve the budgeting process, “Beyond Budgeting” advocates abandoning