Using Budgets for Performance Evaluation: Effects of Resource Allocation and Horizontal Information Asymmetry on Budget Proposals, Budget Slack, and Performance

Posted: 25 Oct 2002

See all articles by Joseph G. Fisher

Joseph G. Fisher

Indiana University - Kelley School of Business - Department of Accounting

Laureen A. Maines

Indiana University - Kelley School of Business - Department of Accounting; PricewaterhouseCoopers

Sean A. Peffer

University of Kentucky - Gatton College of Business and Economics

Geoffrey B. Sprinkle

Indiana University - Kelley School of Business - Department of Accounting

Abstract

Business executives and academics frequently criticize budget-based compensation plans as providing incentives for subordinates to build slack into proposed budgets. In this paper, we examine whether either of two practices - using budgets to allocate scarce resources, or providing information about co-workers - reduces budget slack and increases subordinate performance when organizations use budgets for performance evaluation. The results from our experiment show that using budgets for both resource allocation and performance evaluation not only eliminates budget slack but also increases subordinates' effort and task performance. Additionally, we find that an internal reporting system that provides information about subordinates' budgets and performance to their co-workers mitigates budget slack when superiors do not use budgets as a basis for resource allocation. These results highlight the synergies between the planning (resource allocation) and control (performance evaluation) functions of managerial accounting practices such as budgeting. Our results also suggest that by designing the internal information system to reduce information asymmetry among subordinates, the firm can increase subordinates' incentives to provide more accurate budgets.

Keywords: budgeting, performance evaluation, resource allocation, information, slack, performance

JEL Classification: J33, M40, M41, M46

Suggested Citation

Fisher, Joseph G. and Maines, Laureen A. and Peffer, Sean and Sprinkle, Geoffrey B., Using Budgets for Performance Evaluation: Effects of Resource Allocation and Horizontal Information Asymmetry on Budget Proposals, Budget Slack, and Performance. Available at SSRN: https://ssrn.com/abstract=309748

Joseph G. Fisher

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-3705 (Phone)
812-855-4985 (Fax)

Laureen A. Maines

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2611 (Phone)
812-855-4985 (Fax)

PricewaterhouseCoopers

1301 Avenue of the Americas
New York, NY 10019
United States

Sean Peffer

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
606-257-3149 (Phone)
606-257-3654 (Fax)

Geoffrey B. Sprinkle (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-3514 (Phone)
812-855-4985 (Fax)

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