Participative budgeting and managers' propensity to create budgetary slack : an explanatory framework

Budgeting is an important aspect of organizational life. Lowe and Shaw (1968, p.304) refer to the annual budgeting procedure as probably the most important single decision and control routine of a firm from both the organizational and economic management viewpoints. Budgets provide a focus on planning, both short-term and strategic, on coordination of organizational activities, on control of organizational resources and on organizational performance. Budgets are also used for behavioral purposes: for motivating managers' both in commitment and performance, as a means of control over managers' activities and as a benchmark against which to measure managers' performance. As stated by Kamin and Ronen (1981, p.471), the budget is the skeleton of the control system and as such reflects the organization's goals and is therefore used as both a yardstick for future planning and a performance standard against which to measure actual performance. Schiff and Lewin (1968, p.51) refer to the budget in its final form as an explicit elaboration of organizational commitments for the year that reflects the resolution of demands for resources made by the various subunits of the firm. Implementation of budgets have behavioral effects other than those intended by higher level management. Milani (1975, p.274) points out that a budgeting system designed to assist management may become an instrument which is related to functional and/or dysfunctional behavioral consequences. Schiff and Lewin (1968) refer to 'unintended' behavioral results, such as lower level management circumventing the budget and allocating resources to what they perceive asjustifiable purposes. Swieringa and Moncur (1972, p. 194) summarize the relationship between budgets and those who are involved in the budgeting process as follows: \.. .human behavior has implications for budgeting and.. .budgeting has implications for human behavior\". Cherrington and Cherrington (1973) state that it is not budgets per se that have an effect on people but the positive and negative reinforcing consequences associated with budgets. That is it is not the numbers that form the budget that have behavioral effects on participants but rather the intentions behind the numbers the intentions that are read into the numbers by participants personalities of parties involved organizational structure and so on. Research on both 'intended' and 'unintended' effects stemming from the budgeting process has been extensive and diverse and has examined many of the possible influences noted above (Lowe & Shaw 1968; Schiff & Lewin 1968; Cherrington & Cherrington 1973; Onsi 1973; Kenis 1979; Kamin & Ronen 1981; Brownell 1982; Merchant 1985; Chenhall & Brownell 1988; Lukka 1988; Chow et al 1988; Murray 1990; Dunk 1991; Lai & Smith 1992). The main focus of this research has been on the relationship between participation and performance. This paper will focus on an important aspect of this relationship - the propensity of managers' to create budgetary slack. The propensity to create budgetary slack refers to a manager's tendency or inclination to incorporate a 'buffer' into budgets. The propensity to create budgetary slack (PCBS) is most commonly characterized as the inclination of managers' to set expense budgets higher than the level of costs reasonably expected so as to obtain a favorable variance result. The same concept applies to revenue budgets where the inclination is to propose an inflow that is lower than the estimated inflow so as again to obtain a favorable actual to budget result. The purpose of this study is to develop and empirically test an explanatory framework of managers' PCBS. This framework will incorporate both situational and personality variables in attempting to explain what motivates managers' to want to incorporate slack into budgets. The impact of the PCBS on the relationship between participation and performance will be discussed in the following section highlighting the motivation for studying the PCBS concept. The development of an explanatory framework for the PCBS will then follow leading to the proposition of seven empirically testable hypotheses. The next section details the research method followed by presentation of results. Finally implications of results in light of the limitations of this study are discussed."