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Paying People to Lie: the Truth about the Budgeting Process

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  • Michael C. Jensen

Abstract

This paper analyzes the counterproductive effects associated with using budgets or targets in an organisation's performance measurement and compensation systems. Paying people on the basis of how their performance relates to a budget or target causes people to game the system and in doing so to destroy value in two main ways: (a) both superiors and subordinates lie in the formulation of budgets and, therefore, gut the budgeting process of the critical unbiased information that is required to coordinate the activities of disparate parts of an organisation, and (b) they game the realisation of the budgets or targets and in doing so destroy value for their organisations. Although most managers and analysts understand that budget gaming is widespread, few understand the huge costs it imposes on organisations and how to lower them. Copyright Blackwell Publishing Ltd 2003.

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Bibliographic Info

Article provided by European Financial Management Association in its journal European Financial Management.

Volume (Year): 9 (2003)
Issue (Month): 3 ()
Pages: 379-406

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Handle: RePEc:bla:eufman:v:9:y:2003:i:3:p:379-406

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