CAP 3069: Budgeting

An Overview of the Role of Budgeting in Organizations and Tools to Improve Budgeting

Maastricht University
School of Business and Economics
Maastricht, 15 July 2013
Picareta, G.; i6020893
Study: International Business
Course code: CAP3069
Professor name: Caren Schellemann
Writing Assignment: Capstone-Final Paper

Table of contents
1. Introduction

2. The Role of Budgeting in an Organization

2.1 Decision management and decision control in budgeting
2.2 Decision rights
2.3 Budgeting as communication device

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3
4
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3. Problems with Budgeting

4. Budget Tools: Effects on Behaviour, Performance,

and their Managerial Implications
4.1 Budget-based resource allocation and horizontal information provision
4.2 Increasing the span of control a flatter organization and budgeting
4.3 Reducing budget slack through non-binding budgetary announcements
4.4 Factors affecting vertical information sharing in the budgeting process
4.5 Group budget-based contracts, budget levels and group performance
4.6 Activity-based Budgeting and Beyond Budgeting
4.7 The Budgeting Tool Box

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5
6
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9
10
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5. Summary and Conclusion

15

References

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1. Introduction
Budgeting is like a toolbox. It is deeply engrained in the organizational architecture and used
to assign decision rights and create incentives for employees to act in the owners best
interest. Most textbooks define budgeting as managements formal quantification of the
operations of an organization for a future period. However, there is more to it. The real value
of budgeting does not lie in the finished budget itself but rather in the budgeting process,
which forces the planner to think about the most probable development of the firm under key
planning assumptions. These assumptions are often based on past occurrences such as prices
and general market conditions. This kind of information is not centrally available and hard to
obtain (Gurbaxani & Whang, 1991). This is why the most common method of budgeting is
participative budgeting, which involves eliciting information from subordinates. Thus, the
planner often finds himself forced to accumulate information from all different organizational
levels of the firm. This implies higher-level managers communicating and retrieving input
from the better-informed lower-level managers and employees. The real value of budgeting,
therefore, lies in the information provision and establishment of effective knowledge flows
across the organizational chart (Zimmerman, 2005). Here, employees oftentimes do not have
an incentive to truthfully disclose the specialized knowledge they have at hand. Providing
incentives for the truthful representation of the so-called private information poses one of the
primary challenges to budgeting. Furthermore, as future developments are extremely difficult
to predict and most budgets cover periods of one up to ten years, many budget assumptions
become more prone to error with a prolonging time span. Further, a complex conflict arises
when the subordinates evaluation and compensation are tied to budgets. Supposedly being
the ones best capable of providing a budget estimates, subordinates oftentimes build slack
into the proposals. This happens at the expense of the owner. A wide array of academic
research has tested various budgeting tools and their effect on employee behaviour and
managerial performance. Accordingly, this paper clarifies the role of budgeting in
organizations. The reader will be presented multiple tools of the budgeting toolbox, their
effect on human behaviour, and ultimately on managerial performance.
To investigate into the area of budgeting, this paper proceeds as follows: First, the role of
budgeting in an organization is explained. Second, some problems associated with budgets
are presented. The third section introduces several kinds of budgeting tools and their effect on
managerial behaviour and performance to derive managerial implications from the findings.
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Finally, the paper evaluates the overall applicability of the different tools with respect to the
budget-related problems.

2.

The Role of Budgeting in an Organization

Working with budgets takes priority levels to positions as senior as the CEO which underlines
the importance as well as the strategic role that budgeting plays in organizations (Christie,
Joye, & Watts, 2001). Moreover, companies prepare short-run budgets that cover the time
period of one year. Oftentimes these short-run budgets are linked to long-run budgets that
reflect strategic long-term planning for up to ten years. Working with budgets is a learning
process and implies tracing back revenues and costs incurred, comparing them to budgeted
amounts, and finding explanations as to why certain deviations (variances) occurred. An
unfavourable deviation can disclose an inefficiency that requires adjustment, for example, a
business unit that is not producing the revenues it is expected to.

The core idea then is to

identify reasons for a deviation and make adjustments. Adjustments ideally do not only focus
on one business unit or employee but rather take a holistic view on the problem considering
factors from the entire organization, its strategy and external environment (Horngren, Datar
& Rajan, 2012).
2.1 Decision management and decision control in budgeting
To better understand the role of budgeting in organizations this section takes a closer look at
two primary functions of budgeting (Zimmerman, 2005). The first function is decision
management, which includes the process of collecting knowledge within the firm,
communicating this knowledge across the firm as well as engaging in the planning process.
The second function of budgeting is decision control. It includes assigning decisions rights
and setting up a system for performance measurements. An important trade-off exists
between these two functions (Zimmerman, 2005). Both of the functions are to be aligned with
the firms overall strategy and objectives. This is why most firms give the ultimate control to
the CEO of the firm (placement of decision rights) as he is supposed to have the specialized
knowledge as well as an overview of interdepartmental transactions. A typical example for
decision management is the preparation of budgets. Here, budgets are designed, usually by
operating managers. Subsequently, the companys board gives approval for the budget
request representing decision control. Operating managers who are given autonomy in
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deciding how the budgets are used carry out the budget implementation. Ultimately, the board
of directors has a monitoring function by reviewing monthly operating statements a
decision control function.
2.2 Decision rights
In most cases budgeting systems are bottom-up. That means that low-level managers prepare
the budgets as they hold the specialized knowledge. Alongside this idea decision rights are
allocated to different managers.
Consider, for example, a university with different faculties headed each by one dean. The
deans hold the specialized knowledge about the upcoming number of enrolments. This is why
they are the most suitable to create the budget and send them to the CFO and president for
approval and strategic alignment (Zimmerman, 2005). Thereafter, the board of directors
approves the budgets. Through approval each dean is given the decision rights to
independently operate his or her faculty.
2.3 Budgeting as Communication Device
Another important role budgeting plays within an organization is that it serves as
communication device through which specialized knowledge is communicated horizontally
and vertically (Zimmerman, 2005). Consider a basic manufacturing firm, in which the sales
departments forecast serves as key planning assumption. Approval from production and
inventory is vital to the overall functioning of the firm. A good budget requires information to
be shared and approved horizontally and vertically in the firm.

3.

Problems with Budgeting

A lot of budget practitioners are dissatisfied with budgets (Hansen, Otley & Van der Stede,
2003). This section identifies five specific budgeting problems and subsequently proposes
budget tools to mitigate these problems.
The first problem arises from the bottom-up nature of budgets and the related information
asymmetry. Especially when subordinates are evaluated based on budgets they are setting,
they are inclined to game the budget system by building slack into budget proposals creating
budget proposals that are easily attained. This causes inefficient allocation of budgets as well
as reductions in performance as the firm stays below its capabilities (Zimmerman, 2005).
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Budgeting tools mitigating the problem of budgetary slack pose an important theme in this
paper. Second, according to Hannan, Rankin, and Towry (2010) the control aspect of
budgeting often poses an issue within organizations. Budgets are said to be incompatible with
flat organizations because of their command-and-control nature. This is enforced by the
preconceived notion that the flatter organizations are the more ineffective budgetary control
becomes (Hannan et al. 2010). Third, budgeting is said to achieve insufficient knowledge
sharing (Hansen et al. 2003). Subordinates decide to keep their specialized to their own
benefit thereby foregoing the opportunity of shared knowledge with superiors and other
departments. Fourth, traditional budget-based compensation poses the problem of not
providing incentives beyond the budget target. This yields strong incentives up to the point
where the budget target is reached. However, no performance incentives are provided beyond
the budget target (Jensen, 2001). Finally, a general problem in budgeting is that by the time
that the budget is to be used, key planning assumptions are out-dated since traditional budgets
often receive only yearly updates. This signifies that economic conditions or the competitive
environment have changed to the extent that the budget is not applicable anymore (Hansen et
al. 2003).

4. Budget Tools: Effects on Behaviour, Performance and their Managerial Implications

Management literature has identified various budgeting tools and provided evidence about
the tools effect on managerial performance. This section analyses budgeting tools, explains
their mechanism, how they help to mitigate budget problems, their effect on managerial
performance, as well as their limitations. Based on the results managerial implications are
derived. A graphical output of the results is the core-tool to this paper and provides a
summary of the analysis in a framework the budgeting toolbox.
4.1 Budget-based resource allocation and horizontal information provision
In their experimental study Fisher, Maines, Pfeffer, and Sprinkle (2002) investigate the effect
of two budget methods on budget proposals, budget slack and performance.
The first method is the use of budgets for resource allocation. This means that an approved
budget becomes the allocation base for a firms scarce resources. The results confirm the
prediction that the method leads to more adequate initial budget proposals and

counterbalances subordinates incentives to build slack into the proposals. Further, final
budget proposals included significantly less slack than without the horizontal provision of
information (Maines et al. 2002). Most interestingly, overall performance increased by 25%
relative to the neutral scenario. Explanations for that are the increased allocation of resources
to productive subordinates and the resulting motivation of subordinates to increase output.
The second method involves the reduction of information asymmetry through horizontal
provision of information. This implies sharing facts about a subordinates budget proposal,
budget levels and actual performance with all co-workers.
Sharing information about budgets and subordinate performance increases the initial budget
proposals, and decreases slack in the final budget proposal (Maines et al. 2002). However, against initial expectations performance is not higher when resource allocation is fixed. The
latter suggests higher performance when the superior has the decision rights to allocate
productive resources among subordinates. Hence, information asymmetry affects the proposal
and the final budget, if and only if superiors do not use budgets to allocate resources.
Considering a scenario where a firm does budget-based resource allocation and aims to add
horizontal information provision to increase performance, the combined results suggest that
there is little incremental value provided by adding horizontal information. However, if the
firm does not use budgets to allocate resources the results show that sharing co-workers
performance- and budget information amongst each other, can very well reduce budgetary
slack and improve performance.
Despite a reasonably reliable sample size, doubts can be expressed about the
representativeness of the sample since undergraduate students were used. This is important as
this paper aims to derive real-world managerial implications for actual workers.
4.2 Increasing the span of control a flatter organization and budgeting
The design and effectiveness of the budget system is influenced by the organizational
structure of the firm. The study by Hannan, Rankin, and Towry (2010) investigates the
relationship between the organizational reporting structure and the effectiveness of the
budgeting process. More specifically, the authors examine the relationship between a
superiors span of control defined as the number of subordinates reporting to the superior and the degree of budgetary slack in the subordinates budget proposals.
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Hannan et al. (2010), observe two effects for a relatively flat organizational structure
defined as one where there are several subordinates reporting to a superior which means that
the superior has a large span of control. First, in a relatively flat organization superiors are
more willing to reject budget proposals perceived as having excessive slack relative to an
organization where there is only one subordinate reporting to a superior. The second effect
describes the subordinates anticipating the superiors strictness and reducing the degree of
budget slack. The overall result of these two effects is that the increase in the span of control
augments the superiors profit per subordinate. Thus, increasing the span of control holds the
potential of mitigating the problem of budgetary slack and enhances managerial performance.
This finding is contrary to the preconceived notion that budgeting becomes ineffective in
flatter organizational settings. Further, it is interesting as it differentiates itself from the
common perception that an increase in the span of control leads to a loss of control often
found in agency theory. The core of this difference lies in a move away from the pure
principal-agent analysis where it is assumed that only utility from wealth matters. The model
at hand, however, assumes that subordinates cannot only gain utility from wealth 1 but also
gain utility from enforcing social norms (Hannan, Rankin, and Towry, 2010). This
assumption is justified with references to academic and neurological work that proves that
individuals receive utility from punishing someone who violates social norms (De Quervain,
Fischbacher, Treyer, Schellhammer, Schnyder, Buck & Fehr, 2004). The authors go even
further stating that a superior is ready to incur costs for such punishment. Hence, the model
posits that a superior maximizes utility from both utility from accepting more projects, as
well as through utility from enforcing social norms by rejecting a budget proposal perceived
as containing excess slack.
There are a number of limitations important to consider when looking at the model presented.
In the utility function2 there are two parameters that represent the relative importance of
utility from wealth and utility from enforcing social norms (a and b) represented by two terms
following this a and b. These two parameters have the same value in the study. Thus, equal
importance is assumed. However, it is questionable that utility from wealth and from
1

Wealth to a superior in the study: reported costs actual cost if acccepted; wealth of subordinate Reported cost actual cost

(Hannan, Rankin, and Towry, 2010)

enforcing social norms are equally strong. If this model was to be used in practice the relative
importance of both factors should be gauged and plugged into the function accordingly.
Moreover, apart from three conditions being tested that serve the comparison between a 1:1
scenario and a 1:3 scenario, there is no further testing. No evidence is provided for the effect
of a larger group size. This makes it hard to say something about further flattening the
organization. The last limitation is that only two hierarchical levels are taken into account.
Still, the study by Hannan, Rankin, and Towry (2010) provides an interesting insight into
social preferences an aspect worth taking into account, especially for firms where social
and ethical values play an important role.
4.3 Reducing budget slack through non-binding budgetary announcements
In the budgeting process superiors can choose to make announcement regarding the value of
budget proposals. In their study Rankin, Schwartz and Young (2002) show how management
control problems can be tackled through the use of non-binding budgetary announcements.
Making no announcement serves as benchmark against a scenario where the owner entirely
commits to stick to an announcement about the report that contains the managers private
information and against a non-binding announcement in which the owner leaves it open as to
whether to stick to the announcement or not. The authors find an improvement in information
sharing through non-binding announcements relative to no announcements. The study also
finds that the non-binding announcements serve as pressure instrument for pretending to be
rejecting more profitable projects than actually intended to at least in the short-term. More
specifically, the bluffing conjecture predicts the owner will use the non-binding budgetary
announcement to understate his or her sense of fairness (Rankin et al. 2002). This proved
effective in the first half of the experimental rounds and was thereafter anticipated by the
subject simulating the manager (Rankin et al. 2002). The fact that the non-binding
announcements outperformed is counter-intuitive considering an owner-wealth maximization
and rationality perspective. An explanation for that is that individuals not only have
preferences for wealth but also for fairness. A managerial implication derived from that is that
managers should take into account social attributes such as fairness when dealing with
budgeting schemes.
An important limitation to the tool is that the bluffing effect was anticipated after half of the
experimental rounds. It is reasonable to assume that in a practical setting employees will
rapidly anticipate this effect, making it impossible for the superior to sustain the benefits
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from the bluff effect in the long-term.

4.4 Factors affecting vertical information sharing in the budgeting process

One of the problems associated with budgeting is that budgets oftentimes lead to insufficient
information sharing, as subordinates prefer to keep specialized knowledge for themselves.
The study by Parker and Larissa (2006) sets up a model with multiple variables affecting
information sharing. More specifically the study investigates the effects of vertical
information sharing from subordinate to superior on the basis of a survey with managers and
supervisors. The study goes beyond the investigation of causal relationships and introduces a
model testing the relations for upward and downward information sharing with various
variables such as budget participation, organizational commitment, and job performance. The
findings show a direct link between budget participation and information sharing as well as
organizational commitment. An indirect link is found between budget participation and
organizational commitment, which is mediated through role ambiguity. Unlike prior research
this study suggests that organizational commitment is not directly linked to performance. It is
rather information sharing that mediates the relation between commitment and performance.
Two patterns within the organization are examined upward information sharing and
downward information sharing. In many firms the quality of information has strategic
importance due to a common emergent approach to strategy formation (Parker & Larissa,
2006). The theory underlying this approach is that strategy emerges through the dialogue with
lower-level managers as they hold the specialized knowledge of critical information. The
study finds that budget participation and organizational commitment positively impact
information sharing. Further, information sharing increases performance. Moreover, there is a
common notion that budget participation and organizational commitment have a positive
relation because of the idea that employees involvement in decision-making increases
commitment. However, this was not directly supported.
To analyse downward information sharing role ambiguity was chosen as variable. Role
ambiguity represents an employees lack of clarity about expected behaviour from a job or
position. Role ambiguity had a negative impact on budget participation, organizational
commitment and job performance. An explanation for the drop in job performance is that it
makes subordinates doubt that increased effort leads to higher performance.
These findings have relevant implications for management practice as they provide a wider

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scope of variables that affect information sharing and ultimately performance. Evidence
provided for downward information suggests that managers can improve information sharing
and performance through providing clear job description and making sure the subordinate
clearly understands what is expected from him or her.
The limitations of the study are twofold. On the one hand survey related limitations such as
social-desirability-responding limit the strength of the evidence. On the other hand the study
finds new variables such as role ambiguity to explain variation. Hence, variables with
explanatory power could have been omitted.
4.5 Group budget-based contracts, budget levels, and group performance
So far, this paper has examined the effects of budget types on individual- and organizational
performance. Another interesting budgeting-affected area relates to teams and workgroups.
The frequent use of open offices, teams and group incentives underlines the increasing
importance of team- and workgroup settings in work life. Additionally, group performance
compensation is often favoured over individual incentives as individual performance is
harder to measure. This makes the use of budget-based contracts for group performance a
relevant area to dig in.
The study by Fisher, Peffer and Sprinkle (2003) examines the effects of budget-based
contracts and budget levels on group performance. The authors compare three types of group
incentives and provide evidence that a group-budget linear contract leads to higher group
performance than a group-fixed contract and a group piece rate contract. According to Jensen
(2001) linear compensation contracts hold the advantage of providing performance incentives
beyond the budget target. Further the budget level is examined. Unlike individual
performance, where difficult budgets are associated with higher performance, setting
moderately difficult budgets for groups maximizes performance (Fisher, et al. 2003).
The three group incentive schemes differ in effectiveness due to their mechanism and the
respective economic reaction of the employees subject to the scheme. In all schemes the
subjects have utility from leisure time and utility from rewards related to work time invested.
The first scheme is a group piece-rate contract that rewards all positive levels of group
production. The primary weakness here is that a group member benefits from not working in
the short-term. The long-term strategy referred to as the Nash equilibrium posits that the
parties will both allocate their time to leisure. Accordingly, the piece-rate compensation
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scheme yields the lowest group performance. Additionally, when checking for periodic
effects the authors reported the strongest performance decay reflecting the idea of the Nash
equilibrium (Fisher et al. 2003).
The second scheme is the group-budget fixed contract that gives out no remuneration below
the budget level set and only pays out a fixed bonus after attaining this target. As the team
members are keen on achieving the target this scheme produces a Nash equilibrium that
favours investment of time into working. However, effort and motivation as such are
tempered. The analysis of period effects reflected this and showed a pattern of declining
performance as the achievement of the budget target became foreseeable.
The third scheme is a group-budget linear contract that combines elements of the schemes
previously introduced. It works like the group-budget fixed contract until the target is
reached. Here, a fixed amount is paid. Thereafter, it pays a linear amount, comparable to the
group piece-rate contract. The group-budget linear scheme proved to be superior because of
so-called off-equilibrium incentives compensation incentives that go beyond budget goals.
In the case at hand this was the linear compensation that applied after reaching the budget
goal. The group-budget linear contract yielded by far the highest outcome of 117.14
performance units compared to 89 under the group-budget fixed contract and 80 under the
group piece-rate contract (Fisher et al. 2003).
In addition to the three group incentive schemes, the study by Fisher, Peffer and Sprinkle
(2003) also tested under what budget level employees would perform best as well as the
variance in work-time allocation.
Regarding the budget level, the subjects provided the estimate of the groups maximum
performance capability via a self-estimate. The different budget levels were set accordingly at
50-, 75-, and 100 per cent of maximum performance capabilities. The 75 per cent budget
level led to the highest performance. This finding suggests that the budget planner should set
moderately difficult budgets to maximize group performance as opposed to difficult budgets
to maximize individual performance. An explanation for this difference is that in groupsettings, performance is also dependent on another persons performance resulting in a loss of
motivation when budget are set too high (Fisher, et al., 2003).
Furthermore, variance in work-time allocation and group performance is tested. In general
low variability is desired as it improves planning and coordination. The group-budget linear
contract showed the smallest variance (Fisher, et al., 2003).

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The managerial implications from the results suggest group-budget linear contracts to be a
powerful tool for performance enhancement, especially when used together with moderately
difficult budget goals. It can also promote motivation and coordination due to the low
variability in work time and performance when used. However, three aspects limit the
universal applicability of these results. First, the perspective only considered group
performance and does not take into account owner wealth. Thus, group-budget linear
contracts may not be the type contract maximizing owner wealth. Consider the case where
the gain derived from an additional output by the group is smaller than the cost for
compensation of this additional output. Second, the study did not test for the effect of group
size. The experiments always considered groups of two subordinates. The result may not be
applicable to larger groups. Third, no interaction was allowed within the group. Usually, in
in-group work a minimum degree of interaction can be assumed.
4.6 Activity-Based Budgeting and Beyond Budgeting
Many budget practitioners and authors have proposed to either fundamentally change or
entirely move away from budgeting to ultimately solve budget problems. Hansen, Otley and
Van der Stede (2003) outline these approaches. On the one hand there is Activity-Based
Budgeting (ABB) that suggests improving the budgeting process by first creating an
operational plan that is adjustable to economic or demand fluctuations. Second, the
operational plan is then translated into a financial plan. On the other hand there is the Beyond
Budgeting (BB) approach, which posits removing the budgeting process and radically
decentralizing the firm. This implies replacing budget-based performance measures with
relative financial measures similar to the idea of the balanced scorecard. Unlike methods
previously introduced ABB and BB rather represent directions than actual budgeting tools.
Additionally, no empirical research specifically provides evidence for their effects. Still, the
underlying concepts hold managerial implications. This is why this section shortly looks into
characteristics of ABB and BB and includes them in the framework under conditional
acceptance.
Combining the operational and financial side, the ABB approach avoids unnecessary
calculations of the financial effect of operationally infeasible plans and directly tackles the
problem of out-dated assumptions (Hansen, Otley & Van der Stede, 2003). Furthermore, it
facilitates horizontal information sharing as communication of budgeting information
happens in financial terms. The resulting transparency facilitates resource allocation.
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However, a limitation is that it does not suggest a design of a performance evaluation system.
Additionally, there is little evidence about the success of practical applications of ABB.
The BB approach removes the budgeting process as such and decentralizes the firm.
Managers still prepare financial budgets but are not evaluated through budgets. Instead the
BB approach posits the use of relative measures (KPIs), for example, peer reviews or
competitive benchmarks (Hansen, Otley & Van der Stede, 2003). Comparable to criticism
expressed about the balanced scorecard, the doubts about the BB approach include concerns
about availability of relative measures. Moreover, the decentralization aspect promises more
local information, production processes that require little coordination across units, and an
organization that easily goes through. Theoretically, this can prove handy for organizations in
turbulent environments where initial budgeting assumptions quickly loose relevance and
responsiveness plays an important role.

4.7 The Budgeting Tool Box

The Budgeting Tool Box is a practical summary of the analysis in this section. It contains a
list of all budgeting tools previously analysed with a brief explanation of the potential effect
and the key limitations of the underlying study. The user of this framework shall be aware of
his or her own organizational conditions before applying any of the tools presented as most
findings are based on specific test settings which limit the universal applicability of the tools
introduced.

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5.

Summary and Conclusion

This paper has clarified the role of budgeting in organizations, presented specific budget
problems, and derived managerial implications from the analysis of multiple budgeting tools
that mitigate budgeting-related problems. Budgeting in organizations takes the role of a key
planning instrument and a powerful communication device if employed correctly. Further,
budgeting holds the two functions of decision management and decision control, and is often
used as way to assign decision rights to employees and as basis for evaluation. However, use
of budgets has led to a lot of dissatisfaction due to problems such as the gaming on budget
systems through budgetary slack, budgetings incompatibility with flat organizations,
ineffective knowledge sharing in practice, and an incentive deficit if used as motivation and
compensation tool. The analysis of tools that mitigate these problems has shown behavioural
explanations that go beyond the mere wealth-maximizing assumptions used in agency theory.
Regarding the problem of budgetary slack, four tools were presented that mitigate
subordinates incentive to build slack into their budget proposals. First, the relatively
strongest increase came from budget-based resource allocation. Second, horizontal
information provision proved to be an interesting tool for enhancing internal competition but
was of no added value when used together with budget-based resource allocation (Fisher,
Maines, Peffer & Sprinkle, 2002). Third, - contrary to the idea that flatter organizations lead
to a loss in budget effectiveness the findings by Hannan, Rankin, and Towry (2010) suggest
that flattening the organisation lead to a reduction in budgetary slack, and therefore increase
the effectiveness of budgeting. This finding is remarkable, as it takes into account the social
aspect that employees derive utility from enforcing social norms next to wealth. This is
especially relevant for companys that have a corporate culture emphasizing social norms.
The last tool to reduce budgetary slack posits the use of non-binding budgetary
announcements. Regarding the problem of information sharing this paper identified budget
participation and organizational commitment as variables crucial to effective information
sharing (Parker & Larissa, 2006). Moreover, with respect to group-budget contracts, the
analysis identified group-budget linear contracts as strong incentive for use in groupcompensation as they provide incentives that go beyond the budget target (Fisher, Peffer and
Sprinkle, 2003). In the same group-context optimal budget levels were identified to be most
effective if set at a moderate difficulty. Lastly, Activity Based Budgeting and Beyond
Budgeting represent approaches that move away from traditional budgeting to overcome the

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problem of out-dated assumptions of budgets (Hansen, Otley & Van der Stede (2003). The
limitations of the results of the studies, underline the need of more extensive experimental
and practical testing, especially for the inclusion of more scenarios and the capturing of group
size effects.
Finally, the managerial implications from behaviour observed in the experimental studies
pronounce the importance of considering more than just utility employees derive from
wealth. An eminent challenge for the design and use of budgeting tools and budget-based
incentive schemes is going to be the understanding of social aspects such as norms and
interpersonal relationships.

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