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ACCA Strategic Professional · Advanced Performance Management · Performance and reward

Dalton Retail sets store managers' budgets by negotiation. Managers are paid a bonus when actual profit beats budget. Over several years, managers have consistently understated expected sales and overstated costs during budget setting. What is this behaviour called, and what is the most appropriate design response?

This is budgetary slack: managers deliberately build easy targets into negotiated budgets because bonuses depend on beating them. A sound response is to keep participation but add review, challenge, external benchmarks or stretch targets, and avoid rewarding solely on outperforming the budget, which would reinforce the slack.

  1. ABudgetary slack; use participation with review and challenge, and reward partly on stretch or relative targetsCorrect
  2. BGoal congruence; remove all participation from budget setting
  3. CBudgetary slack; award larger bonuses for beating budget to motivate managers further
  4. DIncremental budgeting; switch to a rolling forecast with no targets

Explanation

Padding budgets to make targets easy is budgetary slack. Rewarding only beating a negotiated budget encourages it. Senior management should review and challenge budgets, use external benchmarks or stretch targets and avoid paying solely on beating budget. Larger bonuses for beating budget would worsen the incentive to build slack.

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