ACCA PM Syllabus D. Budgeting And Control - Staff Motivation and Action - Notes ^{3 / 4}

Staff's acceptance of the use of variances for performance measurement, and their motivation, is likely to increase if they know they will not be held responsible for poor planning and faulty standard setting.

The theory of motivation suggests that having a clearly defined target results in better performance than having no target at all, that targets need to be accepted by the staff involved, and that more demanding targets increase motivation provided they remain accepted.

A basic standard is one that remains unchanged for several years and is used to show trends over time. Basic standards may become increasingly easy to achieve as time passes and hence, being undemanding, may have a negative impact on motivation. Standards that are easy to achieve will give employees little to aim at.

Ideal standards represent the outcome that can be achieved under perfect operating conditions, with no wastage, inefficiency or machine breakdowns. Since perfect operating conditions are unlikely to occur for any significant period, ideal standards will be very demanding and are unlikely to be accepted as targets by the staff involved as they are unlikely to be achieved.

Using ideal standards as targets is therefore likely to have a negative effect on employee motivation.

Current standards are based on current operating conditions and incorporate current levels of wastage, inefficiency and machine breakdown. If used as targets, current standards will not improve performance beyond its current level and their impact on motivation will be a neutral one.

Attainable standards are those that can be achieved if operating conditions conform to the best that can be practically achieved in terms of material use, efficiency and machine performance.

Attainable standards are likely to be more demanding than current standards and so will have a positive effect on employee motivation, provided that employees accept them as achievable.

Participation in standard setting (bottom-up budgets) can be a way of achieving improvements in performance.

However, the effectiveness of participation in setting standards depends on a variety of factors, such as the type of staff involved, the attitudes of their managers, the organisation structure and culture, and the nature of the work.

Motivation can be provided in the form of higher pay or other rewards if targets are reached or exceeded.  This will only happen if employees perceive the standards set as attainable.  Also, as mentioned before in Chapter 7, where rewards are linked to targets, there may be slack when setting standard costs.