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Walker, K. B. and E. N. Johnson. 1999. The effects of a budget-based incentive compensation scheme on the budgeting behavior of managers and subordinates. Journal of Management Accounting Research (11): 1-28.

Summary by Michele Martinez
Ph.D. Program in Accounting 2002
University of South Florida, Spring

Behavioral Issues Main Page | Budgeting Main Page

An important aspect of any management control system is the budget process. Managers for a number of reasons such as; motivation, performance evaluation, product pricing, and investment planning utilize budgeting information. Additionally, a number of diverse things within the organization determine whether the budget process will be effective. Otley (1985) states that past research on the budgeting process has shown that budget estimates are rarely achieved for two principal reasons: (1) imperfect forecasting models and (2) divergence between individual and organizational goals. These problems lead to distorted, or biased, information input to the accounting system. It’s imperative that managers understand budgetary biasing behavior because reliance on biased information may contribute to poor decision-making. Consequently, in order for managers to properly utilize budgetary information they must understand the circumstances under which budgets may become biased.


As stated by the authors’ the purpose of this paper is to report on the budgeting behavior of superior and subordinate members in a Fortune 250 consumer products company before and after the implementation of a budget-based incentive compensation plan for subordinates. The characteristics of the company’s budgeting environment are identified and analyzed using Lukka’s (1988) explanatory framework for budgetary biasing behavior.


1. Provides an account of the implementation of a budget-based incentive compensation scheme for sales employees in a Fortune 250 consumer products manufacturing company. Provides a first-hand account of changes in biasing behavior when targets are linked to subordinates’ incentive compensation.

2. Utilizes Lukka’s framework for budgetary biasing to identify and organize important factors that affected the budgeting behavior of budgetary actors.

Theoretical Background

Budgetary Biasing, Motivation, and Effects of Participation

Budgetary bias consists of three different components:

  • Slack – creating a budget that is easier to achieve in relation to the best forecast.

  • Upward bias – a deliberate overstatement of expected performance.

  • Counter-bias – an attempt by a superior to eliminate bias in a subordinate’s budget with an offsetting bias.

Expectancy Theory

Expectancy Theory predicts an increase in employee motivation with an incentive compensation scheme if the beneficiaries perceive the goal is attainable. The expectancy model of motivation provides that individuals will exert effort only if the effort has a reasonable probability of achieving a defined goal and achieving the goal is associated with positive expectations of receiving desirable outcomes. The outcomes may be extrinsic or intrinsic.

Effects of Organizational Structure on the Budgeting Process

The budgeting process involves simultaneous efforts of both superiors and subordinates. Either aggregating subordinates estimates or disaggregating estimates by a superior may initiate the budget. Three interrelated factors affect the magnitude of budget estimates: (1) estimation method used by subordinates, (2) what will be communicated to the superior, (3) superiors must combine the estimates of subordinates while considering the information at hand and their own likelihood estimates of possible outcomes. Thus, the budget will be viewed as one of two possibilities: 1) flexible, to allow for unexpected events or 2) a best point estimate of what is likely to occur.

Budgetary Biasing Framework

The Budgetary Biasing Framework

This framework is used to identify and organize factors that influence behavior of budgetary actors in the subject organization. The framework explains biasing behavior in the context of human action and specifically allows for differences in contextual characteristics across organizations.

Subject Company

  • Vertically integrated and divisionalized.

  • Sales department (functional subject of the study) employed 325 individuals.

  • Studied for 10 years.

  • Produced and sold two primary products in the food and beverage industry.

Sales Department Organization Chart

Research Method

  • Data used was obtained from two different projects conducted over the study period of 10 years.

  • Initial project was to collect and analyze information for the purpose of making recommendations to the VP sales concerning a proposed budget-based incentive compensation plan for Sales employees.

  • Information for first project was acquired from minutes of meetings, discussion with employees, and direct experience.

  • The idea for the incentive compensation program originated in Year 2 as a result of dissatisfaction among Sales employees. Between years 2-4 the company lost a lot of valuable employees to competitors due to the lack of a compensation plan.

  • Sales management began to study proposals for an employee retention plan beginning in Year 5.

Research Hypothesis

H1: Subordinates’ participatory budget estimates will be lower (easier to achieve) following the implementation of a budget based incentive compensation plan.


Actual quarterly sales volume and two estimates of quarterly sales volume were obtained to test for effects of the incentive plan on budgetary biasing behavior. Ten years of data were analyzed.


  • Sales subordinates built slack into their sales volume targets to achieve increased compensation after the implementation of the incentive plan.

  • Analysis of the sales-budgeting process revealed those sales managers’ budget estimates were driven by their own budgetary objectives, with little reliance placed on subordinate’s estimates.

  • Budget estimates by middle managers were not significantly influenced by the plan.

  • The results from this company provide evidence of the conflicting motivations between subordinates and superiors in preparing budgetary estimates.


  • Subordinates estimates of sales volume at the company exhibited slack-building behavior after the implementation of the incentive plan, consistent with their interests to receive bonuses.

  • Estimation errors by middle managers were not significantly different from those in the pre-incentive plan period, a result contrary to the traditional notion.

  • Discussions with superior managers revealed that their budget estimates were driven by their own budgetary objectives to preserve established patterns of budgetary estimates to satisfy their objectives.

  • The budget review process described in this organization exposes a fundamental shortcoming of much of the existing literature concerned with budget based incentive schemes – failure to incorporate how the budget is used in the organization.

  • The impact of rewards on performance is only one of several considerations in developing and refining budgetary control practices.

  • A group of low-level subordinates in a large organization will not be successful in building slack into budgets on a wide scale.

  • The traditional definitions of bias and slack do not appear to apply in a real-world setting.


Related article summaries:

Bonner, S. E. and G. B. Sprinkle. 2002. The effects of monetary incentives on effort and task performance: Theories, evidence, and a framework for research. Accounting, Organizations and Society 27(4-5): 303-345. (Summary).

Griffin, L. and A. Harrell. 1991. An empirical examination of managers' motivation to implement just-in-time procedures. Journal of Management Accounting Research (3): 98-112. (Summary).

Snead, K. C. 1991. An application of expectancy theory to examine managers' motivation to utilize a decision support system. Abstract. Journal of Management Accounting Research (3): 213-222. (Summary).