ACCA MA Syllabus D. Budgeting - Managerial incentive schemes - Notes 4 / 5
Receiving Financial Rewards
Managers may receive financial rewards (for e.g. bonuses) or non-financial rewards (for e.g. promotion or greater responsibility) based on their ability to meet budget targets.
Budgets by themselves have a limited motivational effect.
It is the reward structure that is linked to achieving the budget requirements, or lack of reward for non-achievement, which provides the real underlying motivational potential of budgets.
A manager will need to regard the reward as being worthwhile if his behaviour is to be influenced so that he/she strives actively towards the achievement of the budget.
Disadvantages of using pay as an incentive
Formal reward and performance evaluation systems can encourage dysfunctional behaviour.
Managers tend to pad their budgets to make the subsequent variances more favourable.
Pay can be a demotivator if targets are not challenging and fair.