Accounting Business Reporting for Decision Making

CHAPTER 9 Budgeting 401

Effect of budget targets on behaviour

This aspect of behaviour relates to the role of budget targets in motivating managers. How motivated a

manager might be is influenced by a range of factors, including:

• the difficulty of the target. Budget targets are best set as challenging but attainable. When a target is

too difficult to achieve, the likely effect is that a manager is demotivated.

• whether the manager feels ‘ownership’ of the target. This is influenced by the extent of input by the

manager which, as discussed above, is a function of the style of budgeting used by the organisation.

• whether the manager is able to control the factors influencing the achievement of the budget target


• whether the budget estimates provide too little scope for managers to properly execute their duties.

DECISION-MAKING EXAMPLE

Effect of targets on behaviour

SITUATION You have recently been enrolled in a Bachelor of Business studying Accounting 101 and

Economics 101. Upon reading the unit outlines, you learn that in order to pass the accounting unit you

need to score 100/100 in the final exam. In contrast, Economics 101 requires only a 30/100 on the

final exam to pass. How will such targets influence your attendance and study approach to both units?

DECISION Obviously, your requirements for both units will lead to different reactions. For Accounting

101 you may protest that the requirement is unattainable as the benchmark set is too difficult to achieve. If

unsuccessful in your attempts to change the pass criteria, you may give up as it seems impossible to meet

the benchmark set. However, Economics 101’s requirement may seem ‘too easy’ and as a consequence

you may not attend class and put in your best effort. If you translate this to business, we can understand

why benchmarks that appear too difficult may have a negative effect on employee performance. Too

slack a benchmark may not encourage employees to work to their full potential and too tight a target may

discourage improved performance. The challenge is to find the appropriate balance.

Of course, targets used to help build the budget are not set in concrete and may need to be revised.

As highlighted in the reality check, ‘Financial institutions and sales targets’, the use of budget targets,

such as sales being linked to performance bonuses, can lead to a culture amongst staff where achieving

the sales level is key, irrespective of consequences for customers or the organisation overall. Westpac is

wanting to focus on a cultural shift, which will have staff focusing on customer satisfaction, as this is

seen as a key driver for future success.

REALITY CHECK

Financial institutions and sales targets

It seems some major financial institutions are reassessing the use of sales and performance targets for

some bank staff. At the Commonwealth Bank Australia in 2014, survey data conveyed a message of

staff being placed under considerable pressure to upsell other banking products to existing customers

in order to meet sales targets. However, the CEO suggested sales targets would remain as part of

the incentive plan for branch staff bonuses. In 2015, Westpac Bank moved away from linking annual

pay rises to sales targets. The challenge for financial institutions is to find ways to encourage the staff

behaviour sought without creating unnecessary pressure on individual managers and employees.

Of course, a whole range of factors influence the success of these initiatives. Nevertheless, a broader

consideration that these two examples illustrate is the potential for unintended consequences caused

by either:

•   poorly selected performance measures; and/or

•   inappropriately linking pay to performance measures.