To participate or not to participate? Voice and explanation effects on performance in a multi-period budget setting

Abstract

Under what circumstances does giving a voice and explanation to a manager in a budget allocation setting improve their performance? The research into whether or not managers should participate or have a voice in setting their budget allocation show conflicting results on performance. This seems largely as a result of the variables being measured in importantly different ways. Whether or not the voice influences the final budget allocation and whether the budget is perceived as unfair, unfavourable or unattainable needs to be clearly articulated in the research design. This study demonstrates that the circumstances in which voice and explanation improve performance depend on whether or not the budget allocation is perceived as unfair. To date, it has been accepted practice that managers should participate in the budget setting process. However, it may be better to set a budget and explain its rationale. Over multiple budget periods care should be taken with the type of explanation given, because simply repeating last year's reason will discourage higher performance.