Corporate Budgeting: Perceptions of a Next Generation of Corporate Leaders

What the paper says

EXECUTIVE SUMMARY Many companies use participative budgeting to empower employees, but how much control of the budget process does senior management actually transfer to rank-and-file employees? A survey of middle managers examines their experiences with budgeting processes. Imagine embarking on a great adventure, leaving the rest of the world behind. You feel confident that you are heading in the right direction as you travel toward the mountainous wilderness you plan to explore with your traveling companions. After all, an experienced travel guide has put together an itinerary after many discussions with you, seeking your input about what you want to see and do on this journey. You arrive at the airport, meet up with your party, and then realize that your airline ticket notes your destination is New York City and your itinerary is for an exploration of the Theater District. You are confused--what happened to going to the mountains for a trek in the wilderness? Did the guide not listen to you at all? Why were you even consulted if your ideas were going to be ignored? This little allegory illustrates how many people in companies see the budgeting process. The primary objective of budgeting is to create a detailed financial plan that guides managers in the acquisition and use of an organization's resources in pursuit of business strategy. (1) But many within organizations feel somewhat like our adventurer who is surprised to discover that the detailed plans are worthless, if not actually harmful, to the achievement of the proposed business strategy. Many also often feel betrayed by management when their solicited suggestions--garnered through espoused participatory budgeting--are ignored or devalued. Participatory budgeting is one of the mechanisms that organizations use to empower employees and promote cross-functional interaction. Budgeting is a high-profile activity, affecting virtually all operating areas and support functions. It is presumed to provide a number of benefits to companies. Budgets formalize ideas and forecasts about the company's future operations, allocate resources in pursuit of its business strategy, align and coordinate a company's different departments and functions, and establish performance benchmarks for eventual results. In recent years, many companies have adopted programs to elicit greater employee participation. Yet questions remain about whether top management substantively transfers decision control to rank-and-file employees. Budgeting serves as a hallmark way that companies adapt (or appear to adapt) to the broader initiative toward employee empowerment. In this case, the surface rhetoric of bottom-up budgeting and employee involvement differs from the reality of top-down management control. (2) Adopting participative processes without substantive commitment can be detrimental to employee morale and management credibility. In addition, team-based, adaptive network-centered organizations have been touted as the appropriate response to dynamic competitive market forces and emerging technologies. The budget process has been researched widely. (3) The same is true for budgetary participation. (4) But what is missing in the current management accounting literature is a closer examination of the extent to which senior management actually transfers control of the budget process to rank-and-file employees when the budget process is deemed to be participatory. Also needed is a greater understanding of employees' perceptions regarding the efficacy and fairness of the budgeting process--for employees who are actively engaged in budget formulation as well as for those who do not profess to have any role in the process. This study aims to address both of those points. Although budgeting is a critical tool for effective business decision making, it frequently has challenges. Many managers and employees view budgeting negatively, frequently associating it with excessive pressure related to unrealistic goals, unreasonable restrictions, authoritarian decision making, and subjectivity. …