Accounting 202
TTH 11:00-12:30
Paying People to lie
Michael’s C. Jensen’s paper explains that the use of budgets or targets to measure an organization’s performance and compensation leads to counterproductive effects within organizations. Jensen believes that the solution to this problem is not to completely eliminate the budgeting systems, but instead to change the way performance is measured, the way rewards are given, and the way punishment is applied.
In budgeting systems, managers are generally rewarded for reaching their targeted levels, and if they do not reach their targets, they are punished. Allowing managers to set their own targets allows them to somehow manipulate (gaming) the target levels by setting levels that can be easily achieved. This is true, especially if a bonus is at stake, managers will do just about everything to reach the goal and collect the bonus.
This strategy clearly creates a problem for organizations because every department will follow the same strategy and set goals that are easily attainable, allowing the achievement of the goals and therefore, the collection of the bonuses. Those actions have negative effects on an organization because departments are not coordinating for the best of the organization and department productivity is not being maximized.
For example, a sales manager might know that with hard work and motivation his or her sales department is capable of reaching sales of $10 million, but to prevent the risk of punishment and to secure a bonus, the manager might set a goal of only $7 million. At the end of the quarter, sales total might be $8 million. Because the manager was allowed manipulate and set his or her own target level, the organization would lose out on $2 million; however, according to the budget, the goal was not only met, but an additional $1 million were generated.
This situation will satisfy top