The relationship between two consequences of budgetary controls: budgetary slack creation and managerial short-term orientation$

Previous studies have provided contradictory evidence with respect to the e€ect of rigid budgetary controls on slack and other dysfunctional behaviors. One motivation for the current study was to test whether spillover e€ects exist between two alleged dysfunctional consequences of a rigid budgetary control style: budget slack creation and managerial short-term orientation. The data support this contention: reducing one form of dysfunctional behavior (slack creation) through rigid controls seems to spill over into another form (stronger management focus on business matters that a€ect short-term results). However, the budgetary control styles that organizations implement, as well as the behaviors that they encourage, may be a€ected by two important antecedents: business unit past performance and competitive strategy. The results indicate that business units that either pursue a di€erentiation strategy or have been more pro®table are subject to less rigid budgetary controls, which augment the propensity to build slack as well as the tendency for managers to think long-term. These relationships are tested in a structural equation model on survey data obtained from 153 business unit general managers. # 2000 Elsevier Science Ltd. All rights reserved. Since Hopwood's (1972) seminal paper, the budgeting literature has shown great interest in understanding possible e€ects of budgetary control styles. It is generally maintained that the incidence of so-called dysfunctional behavior is a€ected by the rigidity of budgetary controls. A rigid budgetary control style is one in which employees, mostly at management organization levels, are evaluated primarily on whether or not they achieved their budget. When evaluated in this way, managers are held fully accountable for their performance as measured by the budget. This implies that salary, resources, and career prospects become highly, if not fully, dependent on the managers' ability to meet the budget. Managers who miss the targets face the prospect of interventions by upper management, the loss of organizational resources, the loss of annual bonuses, and ultimately the loss of their job (Merchant & Manzoni, 1989). Under these circumstances, managers may look for ways to protect themselves from the downside risk of missing budget targets and the stigma normally attached to underachievers (Lukka, 1988; Onsi, 1973; Schi€ & Lewin, 1970). Possible ways of protection can be obtained by negotiating for highly achievable targets (i.e. slack creation) or by focusing on business matters that improve current 0361-3682/00/$ see front matter # 2000 Elsevier Science Ltd. All rights reserved. PI I : S0361-3682(99 )00058-6 Accounting, Organizations and Society 25 (2000) 609±622 www.elsevier.com/locate/aos $Data availability: survey data is available from the author