AYB321 Lecture Notes - Schlumberger, Radical Change, Ikea
Document Summary
If the budget is inaccurate: targets are too easy (or hard, firms have too much (or little) capacity, value is destroyed. Refers to the level of involvement lower level managers have in setting their own budget. Disadvantages: uses managers" specific knowledge, encourages communication and coordination between managers, creates ownership" of the final budget targets. Budgetary slack: slow, opens the firm up to influence costs, especially when budget performance is tied to the reward system, budgetary slack. Difference between the projection a person provides and a realistic estimate. Three main reasons for budget padding by bu managers: seen to be performing better if they beat the budget", provides a shield against unanticipated negative impacts (reduces risk), expectation of arbitrary budget cuts by the budget committee. Tying rewards to the budget increases the perverse incentive, impacts budget integrity. Budget difficulty refers to how difficult it is expected to be to achieve the budget.
