The Effects of a Budget-Based Incentive Compensation Scheme on the Budgeting Behavior of Managers and Subordinates.

This paper reports the budgeting behavior of superior and subordinate members in a Fortune 250 consumer products company before and after the implementation of a budget-based incentive compensation plan for subordinates. The characteristics of the company's budgeting environment are identified and analyzed using Lukka's (1988) explanatory framework for budgetary biasing behavior. Empirical data and interviews of company employees at several hierarchical levels are used to investigate the budgeting process and relate the actions of budgetary participants to the social and political context of the organization. The results indicate that subordinates exhibited slack-building behavior after the implementation of the incentive compensation plan, but budget estimates by middle managers were not significantly influenced by the plan. The actions of the various budgetary actors are discussed and analyzed in the context of Lukka's (1988) framework and the pluralistic, multirational view of the organization (Dermer and Lucas 1986; Dermer 1988).