Highly achievable budget targets reduce the risk of gameplaying. The stakes asso

Question

Highly achievable budget targets reduce the risk of gameplaying. The stakes associated with budget achievement in most firms, which include bonuses, promotions, and job security, are so significant that managers who are in danger of failing to achieve their budget targets have powerful motivations to play games, either with the numbers or through foolhardy decisions.” Critically evaluate the above statement in the context of appropriate amount of a challenge in a financial performance target. Based on your evaluations, do you think Mr. Mehli Mistri and his subordinates will be involved in gameplaying activities? Explain

Explanation / Answer

Highly achievable budget targets reduce the risk of gameplaying. The stakes associated with budget achievement in most firms, which include bonuses, promotions, and job security, are so significant that managers who are in danger of failing to achieve their budget targets have powerful motivations to play games with the numbers. Games are actions managers take to make their performance indicators look more favourable while knowing the actions are having no positive effects on real performance, and might actually be harming it. This gameplaying may involve deceptive accounting practices (altering judgments about reserves, changing accounting Methods) or costly operating decisions (working overtime to boost sales and profits at year end, delaying preventive maintenance). The games can be designed to boost current period's performance or, if the targets are considered impossible to achieve, to reduce current period's performance to position the entity for better performance in the subsequent measurement period.

The primary risk organizations face by setting highly achievable budget targets is that manager aspirations, and hence motivation and performance, might be lower than they should be. The managers might not be inspired to perform at their maximum. This is a potentially serious risk; however, organizations can protect themselves giving managers incentives to exceed their budget targets. Managers earn all (or sometimes most) of their bonuses by exceeding their bucket targets (up to a pre specified maximum). If the rewards given for exceeding budget targets are sufficiently high relative to those given merely for achieving the budget targets, managers will have incentives not to slack off after the achievement of their budget targets is assured.

While the use of highly achievable budget targets is the typical corporate practice, not all budget targets should be set to be highly achievable. If the corporation is in danger of failing or defaulting on a significant loan, top managers may set highly challenging profit targets to Signal to operating managers the short-term exigency. Top managers sometimes also set high profit targets to limit managers' discretionary investments both as a way to provide a signal to business unit managers that the unit's strategy has changed (that is, that short-term profits now have priority over growth) and to enforce that change. They sometimes set high targets because they suspect organizational fat or because they want to set up a rationale to replace a manager. They may also set high targets to penalize managers for earning high bonuses in prior periods based solely on luck, not their own efforts.

Another budget target-setting possibility is to set multiple levels of targets, such as optimistic, realistic, and worst case, each designed to serve a different budget purpose (motivation, planning, or control). This is a budget-focused approach to contingency planning. However, the survey of practice indicated that only 7% of the respondent firms use different budgets to serve multiple budgeting purposes better.

Based on previous evaluations it might be possible that Mr Mehli Mistri and his subordinates are involved in gameplaying activities to complete the high budget target.

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