Skip to main content

Advertisement

SpringerLink
Log in

Budgetary slack under budget-based incentive schemes—the behavioral impact of social preferences, organizational justice, and moral disengagement

  • Short Survey Paper
  • Published:
Journal of Management Control Aims and scope Submit manuscript

Abstract

This article examines factors influencing the creation of budgetary slack under budget-based incentive schemes. Classical agency theory serves as the starting point, with the dual role of budgeting as a planning and a motivational instrument. Under the assumption of fully rational utility maximizers, people should incorporate the maximum amount of budgetary slack possible given budget-related compensation. However, this behavior cannot be observed in reality or in experimental settings. Therefore, two important questions remain partially unanswered with regard to explaining the phenomenon of budgetary slack: First, why do individuals not maximize their own utility through budgetary slack? And, second, why is budgetary slack not eliminated completely due to reasons leading to the first question? Behavioral accounting research in this area has gained significant importance in the last years. In this domain, we focus on studies employing the psychological theories of social preferences, organizational justice, and moral disengagement and present primarily experimental as well as survey-based field research findings. The analysis leads to suggestions for further research in this area.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. We acknowledge the difficulty of specifying one classical agency model given numerous different specifications discussed especially in the analytical accounting literature. Lambert (2007) gives a good overview of agency theory in management accounting contexts. As our baseline model we assume what he calls “the ‘plain vanilla’ principal agent model” (p. 248) with one principal and one agent, if not indicated differently: The risk-neutral principal (having the property rights to the joint outcome) chooses the form and the incorporated variables of a compensation function to maximize his or her own utility subject to the risk-averse agent’s incentive compatibility and individual rationality constraints in a single-period model. The agent’s type (e.g., in terms of capability and motivation) is unknown to the principal, as is the (unobservable) effort exerted by the agent given a certain contract. The agent’s utility function (unknown to the principal) is additively separable into compensation and costs of effort. However, the outcome (a function of the agent’s effort and noise) is observable and can be contracted on (second-best solution). Extensions of this model explicitly broaden the narrow view of utility, thus trying to draw a more holistic picture of human behavior. As this paper focuses on human behavior itself, we refrain from discussing its formal representation.

  2. We consider the psychological concepts as the focus of the paper. Thus we do not discuss the methodology of each study surveyed.

  3. Please note that this paper does not attempt to give advice on configuration issues, such as the selection of the assessment base, target difficulty level etc. In particular, the design of truth-inducing budgeting or reporting schemes is not part of this study (e.g., Lohmann and Lombardo 2014).

  4. As mentioned before, we acknowledge the fact that more sophisticated agency frameworks have been developed to explain budgetary slack which offer additional agency explanations (e.g., Webb 2002; Indjejikian and Matĕjka 2006; Mittendorf 2006; Heinle et al. 2014). However, in this survey we decided to focus on three heavily discussed psychological theories.

References

  • Abdullah, I.A. (2013). The influence of horizontal equity, self efficacy, and ethical position on the creation of budgetary slack. Dissertation, Virginia Commonwealth University.

  • Adams, J. S., & Rosenbaum, W. B. (1962). The relationship of worker productivity to cognitive dissonance about wage inequities. Journal of Applied Psychology, 46, 161–164.

    Article  Google Scholar 

  • Alexander, S., & Ruderman, M. (1987). The role of procedural and distributive justice in organizational behavior. Social Justice Research, 1, 177–198.

    Article  Google Scholar 

  • Antle, R., & Eppen, G. D. (1985). Capital rationing and organizational slack in capital budgeting. Management Science, 31, 163–174.

    Article  Google Scholar 

  • Arnold, M. C. (2007). Experimentelle Forschung in der Budgetierung—Lügen, nichts als Lügen? Journal für Betriebswirtschaft, 57, 69–99.

  • Aronson, E. (1992). The return of the repressed: dissonance theory makes a comeback. Psychological Inquiry, 3, 303–311.

    Article  Google Scholar 

  • Bandura, A. (2002). Selective moral disengagement in the exercise of moral agency. Journal of Moral Education, 31, 101–119.

    Article  Google Scholar 

  • Bandura, A., Barbaranelli, C., Caprara, G. V., & Pastorelli, C. (1996). Mechanisms of moral disengagement in the exercise of moral agency. Journal of Personality and Social Psychology, 71, 364–374.

    Article  Google Scholar 

  • Barsky, A. (2011). Investigating the effects of moral disengagement and participation on unethical work behavior. Journal of Business Ethics, 104, 59–75.

    Article  Google Scholar 

  • Berens, W., Knauer, T., Sommer, F., & Wöhrmann, A. (2013). Gemeinsamkeiten deutscher Controlling Ansätze—Konzeption und empirische Analyse von Stellenanzeigen. Controlling—Zeitschrift für erfolgsorientierte Unternehmenssteuerung, 25, 223–229.

  • Birnberg, J. G., Luft, J., & Shields, M. D. (2007). Psychology theory in management accounting research. In C. S. Chapman, A. G. Hopwood, & M. D. Shields (Eds.), Handbook of Management Accounting Research (Vol. 1, pp. 113–135). Amsterdam: Elsevier.

  • Bonner, S. E., & Sprinkle, G. B. (2002). The effects of monetary incentives on effort and task performance: theories, evidence, and a framework for research. Accounting, Organizations and Society, 27, 303–345.

    Article  Google Scholar 

  • Bozeman, D. P., & Kacmar, K. M. (1997). A cybernetic model of impression management processes in organizations. Organizational Behavior and Human Decision Processes, 69, 9–30.

    Article  Google Scholar 

  • Brown, J. L., Evans, J. H. III., & Moser, D. V. (2009). Agency theory and participative budgeting experiments. Journal of Management Accounting Research, 21, 317–345.

  • Chow, C. W., Cooper, J. C., & Waller, W. S. (1988). Participative budgeting: effects of a truth-inducing pay scheme and information asymmetry on slack and performance. The Accounting Review, 63, 111–122.

  • Church, B. K., Hannan, R. L., & Kuang, X. J. (2012). Shared interest and honesty in budget reporting. Accounting, Organizations and Society, 37, 155–167.

    Article  Google Scholar 

  • Covaleski, M., Evans, J. H. III., Luft, J., & Shields, M. D. (2003). Budgeting research: three theoretical perspectives and criteria for selective integration. Journal of Management Accounting Research, 15, 3–49.

  • Cyert, R. M., & March, J. G. (1963). A behavioral theory of the firm. Upper Saddle River: Prentice Hall.

    Google Scholar 

  • Davila, T., & Wouters, M. (2005). Managing budget emphasis through the explicit design of conditional budgetary slack. Accounting, Organizations and Society, 30, 587–608.

    Article  Google Scholar 

  • Davis, S., DeZoort, F. T., & Kopp, L. S. (2006). The effect of obedience pressure and perceived responsibility on management accountants’ creation of budgetary slack. Behavioral Research in Accounting, 18, 19–35.

    Article  Google Scholar 

  • Derfuß, K. (2009). The relationship of budgetary participation and reliance on accounting performance measures with individual-level consequent variables: a meta-analysis. European Accounting Review, 18, 203–239.

    Article  Google Scholar 

  • Detert, J. R., Treviño, L. K., & Sweitzer, V. L. (2008). Moral disengagement in ethical decision making: a study of antecedents and outcomes. Journal of Applied Psychology, 93, 374–391.

    Article  Google Scholar 

  • Diekmann, K. A. (1997). “Implicit justifications” and self-serving group allocations. Journal of Organizational Behavior, 18, 3–16.

    Article  Google Scholar 

  • Douthit, J. D., & Stevens, D. E. (2015). The robustness of honesty effects on budget proposals when the superior has rejection authority. The Accounting Review, 90, 467–493.

    Article  Google Scholar 

  • Dunk, A. S., & Nouri, H. (1998). Antecedents of budgetary slack: a literature review and synthesis. Journal of Accounting Literature, 17, 72–96.

    Google Scholar 

  • Evans, J. H. III., Hannan, R. L., Krishnan, R., & Moser, D. V. (2001). Honesty in managerial reporting. The Accounting Review, 76, 537–559.

  • Ewert, R., & Wagenhofer, A. (2014). Interne Unternehmensrechnung (8th ed.). Berlin: Springer.

    Book  Google Scholar 

  • Fehr, E., & Fischbacher, U. (2002). Why social preferences matter—the impact of non-selfish motives on competition, cooperation and incentives. The Economic Journal, 112, C1–C33.

    Article  Google Scholar 

  • Ferreira, A., & Otley, D. (2009). The design and use of performance management systems: an extended framework for analysis. Management Accounting Research, 20, 263–282.

    Article  Google Scholar 

  • Festinger, L. (1957). A theory of cognitive dissonance. Row, Peterson & Co, Evanston.

  • Fisher, J. G., Frederickson, J. R., & Peffer, S. A. (2002). The effect of information asymmetry on negotiated budgets: an empirical investigation. Accounting, Organizations and Society, 27, 27–43.

    Article  Google Scholar 

  • Fisher, J. G., Sprinkle, G. B., & Walker, L. L. (2007). Experimental budgeting research: implications for practitioners. Journal of Corporate Accounting and Finance, 18, 67–75.

    Article  Google Scholar 

  • Folger, R. (1987). Distributive and procedural justice in the workplace. Social Justice Research, 1, 143–159.

    Article  Google Scholar 

  • Frey, B. S., & Osterloh, M. (2000). Pay for performance—immer empfehlenswert? Zeitschrift Führung und Organisation, 69, 64–69.

    Google Scholar 

  • Greenberg, J. (1988). Cultivating an image of justice: looking fair on the job. The Academy of Management Executive, 2, 155–157.

    Article  Google Scholar 

  • Greenberg, J. (1990). Organizational justice: yesterday, today and tomorrow. Journal of Management, 16, 399–432.

  • Greiner, O. (2004). Strategiegerechte Budgetierung: Anforderungen und Gestaltungsmöglichkeiten der Budgetierung im Rahmen der Strategierealisierung. Munich: Vahlen.

  • Günther, T. W. (2013). Conceptualisations of ‘controlling’ in German-speaking countries: analysis and comparison with Anglo-American management control frameworks. Journal of Management Control, 23, 269–290.

    Article  Google Scholar 

  • Hannan, R. L., Rankin, F. W., & Towry, K. L. (2006). The effect of information systems on honesty in managerial reporting: a behavioral perspective. Contemporary Accounting Research, 23, 885–918.

    Article  Google Scholar 

  • Hansen, S. C., & van der Stede, W. A. (2004). Multiple facets of budgeting: an exploratory analysis. Management Accounting Research, 15, 415–439.

    Article  Google Scholar 

  • Hartmann, F. G. H., & Maas, V. S. (2010). Why business unit controllers create budget slack: involvement in management, social pressure, and Machiavellianism. Behavioral Research in Accounting, 22, 27–49.

    Article  Google Scholar 

  • Heinle, M. S., Ross, N., & Saouma, R. E. (2014). A theory of participative budgeting. The Accounting Review, 98, 1025–1050.

    Article  Google Scholar 

  • Hobson, J. L., Mellon, M. J., & Stevens, D. E. (2011). Determinants of moral judgments regarding budgetary slack: an experimental examination of pay scheme and personal values. Behavioral Research in Accounting, 23, 87–107.

    Article  Google Scholar 

  • Indjejikian, R. J., & Matĕjka, M. (2006). Organizational slack in decentralized firms: the role of business unit controllers. The Accounting Review, 81, 849–872.

    Article  Google Scholar 

  • Jaworski, B. J., & Young, S. M. (1992). Dysfunctional behaviour and management control: an empirical study of marketing managers. Accounting, Organizations and Society, 17, 17–35.

    Article  Google Scholar 

  • Jensen, M. C. (2003). Paying people to lie: the truth about the budgeting process. European Financial Management, 9, 379–406.

    Article  Google Scholar 

  • Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.

    Article  Google Scholar 

  • Lambert, R. A. (2007). Agency theory and management accounting. In C. S. Chapman, A. G. Hopwood, & M. D. Shields (Eds.), Handbook of Management Accounting Research (Vol. 1, pp. 247–268). Amsterdam: Elsevier.

  • Libby, T. (1999). The influence of voice and explanation on performance in a participative budgeting setting. Accounting, Organizations and Society, 24, 125–137.

    Article  Google Scholar 

  • Libby, T. (2003). The effect of fairness in contracting on the creation of budgetary slack. Advances in Accounting Behavioral Research, 6, 145–169.

    Article  Google Scholar 

  • Lindquist, T. M. (1995). Fairness as an antecedent to participative budgeting: examining the effects of distributive justice, procedural justice and referent cognitions on satisfaction and performance. Journal of Management Accounting Research, 7, 122–147.

    Google Scholar 

  • Little, H. T., Magner, N. R., & Welker, R. B. (2002). The fairness of formal budgetary procedures and their enactment: relationships with managers’ behavior. Group and Organization Management, 27, 209–225.

    Article  Google Scholar 

  • Lohmann, C., & Lombardo, S. (2014). Resource allocation within a budgeting game: truthful reporting as the dominant strategy under collusion. Journal of Management Control, 25, 33–54.

    Article  Google Scholar 

  • Luft, J. (1997). Fairness, ethics and the effect of management accounting on transaction costs. Journal of Management Accounting Research, 9, 199–216.

    Google Scholar 

  • Luft, J., & Shields, M. D. (2009). Psychology models of management accounting. Foundations and Trends in Accounting, 4, 199–345.

    Article  Google Scholar 

  • Luft, J., & Shields, M. D. (2007). Mapping management accounting: graphics and guidelines for theory-consistent empirical research. In C. S. Chapman, A. G. Hopwood, & M. D. Shields (Eds.), Handbook of Management Accounting Research (Vol. 1, pp. 27–95). Amsterdam: Elsevier.

  • Malmi, T., & Brown, D. A. (2008). Management control systems as a package—opportunities, challenges and research directions. Management Accounting Research, 19, 287–300.

    Article  Google Scholar 

  • Matuszewski, L. J. (2010). Honesty in managerial reporting: is it affected by perceptions of horizontal equity? Journal of Management Accounting Research, 22, 233–250.

    Article  Google Scholar 

  • Merchant, K. A. (1985). Budgeting and the propensity to create budgetary slack. Accounting, Organizations and Society, 10, 201–210.

    Article  Google Scholar 

  • Merchant, K. A., & van der Stede, W. A. (2012). Management control systems: performance measurement, evaluation and incentives. Harlow: Pearson.

    Google Scholar 

  • Mittendorf, B. (2006). Capital budgeting when managers value both honesty and perquisites. Journal of Management Accounting Research, 18, 77–95.

    Article  Google Scholar 

  • Nikias, A. D., Schwartz, S. T., Spires, E. E., Wollscheid, J. R., & Young, R. A. (2010). The effects of aggregation and timing on budgeting: an experiment. Behavioral Research in Accounting, 22, 67–83.

    Article  Google Scholar 

  • Paz, M., Reichert, B. E., & Woods, A. (2013). How does peer honesty affect focal manager honesty in a budget reporting setting? Advances in Accounting Behavioral Research, 16, 85–114.

    Article  Google Scholar 

  • Rankin, F. W., Schwartz, S. T., & Young, R. A. (2008). The effect of honesty and superior authority on budget proposals. The Accounting Review, 83, 1083–1099.

    Article  Google Scholar 

  • Renn, R. W. (1998). Participation’s effect on task performance: mediating roles of goal acceptance and procedural justice. Journal of Business Research, 41, 115–125.

    Article  Google Scholar 

  • Schäffer, U., & Zyder, M. (2007). Eine Analyse des moderierenden Einflusses der Faktoren Wettbewerbsintensität, Marktdynamik und dezentrale Autonomie auf die erfolgreiche Gestaltung der Budgetierung. Zeitschrift für Planung und Unternehmenssteuerung, 18, 7–33.

  • Schiff, M., & Lewin, A. Y. (1970). The impact of people on budgets. The Accounting Review, 45, 259–268.

  • Simons, R. (1995). Levers of control: how managers use innovative control systems to drive strategic renewal. Boston: Harvard Business School Press.

    Google Scholar 

  • Simons, R. (2000). Performance measurement and control systems for implementing strategy. Upper Saddle River: Prentice Hall.

    Google Scholar 

  • Sprinkle, G. B., & Williamson, M. G. (2007). Experimental research in managerial accounting. In C. S. Chapman, A. G. Hopwood, & M. D. Shields (Eds.), Handbook of Management Accounting Research (Vol. 1, pp. 415–444). Amsterdam: Elsevier.

  • Sprinkle, G. B., Williamson, M. G., & Upton, D. R. (2008). The effort and risk-taking effects of budget-based contracts. Accounting, Organizations and Society, 33, 436–452.

    Article  Google Scholar 

  • Stevens, D. E. (2002). The effects of reputation and ethics on budgetary slack. Journal of Management Accounting Research, 14, 153–171.

    Article  Google Scholar 

  • Thibaut, J., & Walker, L. (1978). A theory of procedure. California Law Review, 66, 541–566.

    Article  Google Scholar 

  • Walker, L., Lind, E. A., & Thibaut, J. (1979). The relation between procedural and distributive justice. Virginia Law Review, 65, 1401–1420.

    Article  Google Scholar 

  • Webb, R. A. (2002). The impact of reputation and variance investigations on the creation of budget slack. Accounting, Organizations and Society, 27, 361–378.

    Article  Google Scholar 

  • Wentzel, K. (2004). Do perceptions of fairness mitigate managers’ use of budgetary slack during asymmetric information conditions? Advances in Management Accounting, 13, 223–244.

    Article  Google Scholar 

  • Wömpener, A. (2008). Behavioral budgeting: Beschränkte Rationalität von kognitiven Urteils—und Entscheidungsprozessen. Hamburg: Kovač.

  • Young, S. M. (1985). Participative budgeting: the effects of risk aversion and asymmetric information on budgetary slack. Journal of Accounting Research, 23, 829–842.

    Article  Google Scholar 

  • Zhang, Y. (2008). The effects of perceived fairness and communication on honesty and collusion in a multi-agent setting. The Accounting Review, 83, 1125–1146.

    Article  Google Scholar 

  • Zyder, M. (2007). Die Gestaltung der Budgetierung—Eine empirische Untersuchung in deutschen Unternehmen. Wiesbaden: Deutscher Universitäts.

Download references

Author information

Authors and Affiliations

  1. Hohenzollernstraße 21, 40211, Düsseldorf, Germany

    Thomas Liessem

  2. Münster School of Business and Economics, University of Münster, Universitätsstraße 14-16, 48143, Münster, Germany

    Ivo Schedlinsky, Anja Schwering & Friedrich Sommer

Authors
  1. Thomas Liessem
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Ivo Schedlinsky
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Anja Schwering
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Friedrich Sommer
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Friedrich Sommer.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Liessem, T., Schedlinsky, I., Schwering, A. et al. Budgetary slack under budget-based incentive schemes—the behavioral impact of social preferences, organizational justice, and moral disengagement. J Manag Control 26, 81–94 (2015). https://doi.org/10.1007/s00187-015-0206-1

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00187-015-0206-1

Keywords

JEL Classification

Search

Navigation