MA Week 7 Readings

Question 1

Summary of Argyris reading (psychological impact)

• Budgets become a mean to express leadership style
• DYSFUNCTIONAL consequences of budgets

Answer 1

1. Success in meeting budget = reward. Failure = penalisation & punishment. So if budgets are prepared inadequately, may lead to wrongful rewards and/or wrongful punishments
   * Budgets fail to increase human efficiency in long run!
2. Unhealthy competition, intra-organisational conflict, shifts away from unifying overall goal of company success
3. Using budgets as PRESSURE DEVICE may have adverse effects on productivity. Workers can only tolerate a certain level of pressure, become WORN OUT.
   - applying pressure on workers to increase productivity inherently implies them to be lazy/unproductive on their own > workers feel undervalued & demotivated.
4. Pressure accumulation may = GROUP formation of workers suffering the same pressure.
   - over time may gain enough strength to confront mgmt & fight against pressure
   - such groups can exacerbate the impact of the pressure, eg. exaggerate and spread untrue rumours about increasing pressure out of fear that the pressure will be renewed
   » If Workers become SUSPICIOUS of increasing pressure, production may decrease to yield long-term -ve impacts
   » Supervisors also feel pressured -> frustration -> can’t work as effectively as before
5. Success of finance ppl stems from identifying weaknesses of the factory ppl -> BLAME culture
6. A wall can be created between the finance ppl & factory ppl, as finance ppl may purposely use jargons and unclearly present budgets to factory ppl
   - finance ppl can exploit the factory ppl’s lack of understanding of budgets to find their shortcomings and blame them, so that they are rewarded by their bosses for their “good job” in identifying inefficiencies in production
7. Could not find causation between PARTICIPATIVE budgets and SATISFACTION/motivation/performance
   - supervisors don’t say their views, might be b/c don’t understand
   - so supervisors just agree to budgets although may not really accept it (PSEUDO-participation)

Question 2

Summary of Jensen reading (economic impact)

Answer 2

1. Budgets have counterproductive effects when used as TARGETS in an org.’s compensation system
   &raquo_space; Budgets are not the problem but the fact that meeting the budget is used to award bonuses
   - May lower company’s PROFITS overall
   - ‘Gaming’ leads to loss of INTEGRITY in organisations
2. Both superiors & subordinates lie in the formulation/setting of budgets then also GAME the realisation of the budgets
   - set easily reachable targets
3. Budget-based systems reward ppl for lying & punish ppl for telling the truth.
   - to solve this, we should utilise bonus structures that are independent of whether budget met or not (linear pay-for-performance compensation systems). So that no more incentive to lie & budgets can be used for planning/coordinating
4. Budgets are supposed to play a critical role in coordinating disparate parts of a company, but untrue when the budget-targeting process hides and destroys critical information.

Incentive issues:

4. Managers who run the risk of just missing the budget target will MOVE REVENUES from next year into this year and move EXPENSES from this year to next year
   - Expenses pushed back -> short term gain but at expense of next year’s loss
   - can even encourage engagement in fraudulent activity
5. People more inclined to lie at a certain point, e.g. if they’re just before bonus threshold