Budgeting, Psychological Contracts, and Budgetary Misreporting

Susanna  Gallani; Ranjani  Krishnan; Eric J. Marinich; Michael D. Shields

Article | Management Science | 2010

Budgeting, Psychological Contracts, and Budgetary Misreporting

by Susanna Gallani, Ranjani Krishnan, Eric J. Marinich and Michael D. Shields

Abstract

This study examines the effect of psychological contract breach on budgetary misreporting. Psychological contracts are mental models or schemas that govern how employees understand their exchange relationships with their employers. Psychological contract breach leads to feelings of violation and can occur even when employees’ economic contracts are fulfilled. We study the effects of psychological contract breach on three common types of employee participation in budgeting that differ in the degree of employees’ influence over their approved budgets. These include affirmative budgeting (full influence), consultative budgeting (moderate influence), and authoritative budgeting (low influence). When organizations communicate that employees will be involved in budgeting, employees develop psychological contracts of affirmative budgeting. If employees subsequently experience authoritative or consultative budgeting, their psychological contracts are breached. Employees who experience psychological contract breach seek redress through budgetary misreporting. Experimental results indicate that psychological contract breach partially mediates the relation between budgeting type and budgetary misreporting. Results also indicate asymmetry in the effects of psychological contract breach versus repair. Effects of breach on budgetary misreporting persist even after the breach no longer occurs.

Keywords: Budgeting; psychological contracts; misreporting; Budgets and Budgeting; Employees; Trust;

Format: Print

Find at Harvard Read Now

Citation:

Gallani, Susanna, Ranjani Krishnan, Eric J. Marinich, and Michael D. Shields. "Budgeting, Psychological Contracts, and Budgetary Misreporting." Management Science 65, no. 6 (June 2019): 2924–2945.

Case | HBS Case Collection | August 2019

Bark Gift Shop Ltd.

Susanna Gallani, Jan Bouwens and Peter Kroos

This case describes a setting in which the CFO of Bark Gift Shop Ltd., a gift items retailer, discovers an undesired pattern in the performance data suggesting that her shop managers that perform well during the first part of the year, purposely reduce their effort in the later part of the year. This pattern drives the CFO to reflect on the process by which she sets annual targets for shop managers and how those targets relate to various aspects of their compensation contract. Challenging targets, however, appear to be motivating for a sizeable amount of shop managers. In fact, many shop managers that repeatedly fail to meet the target appear not to be giving up and keep trying to achieve their challenging targets. Therefore, the CFO needs to strike the right balance between providing motivating targets and curbing the undesired behaviors that she just discovered. The case lends itself to a rich discussion of common performance management issues, such as target setting, performance metrics selection, and performance-based compensation design. In particular, the case exposes the students to the issue of target ratcheting. As the case includes a data base it provides ample opportunities for students to practice their analytical skills (producing and discussing descriptive statistics, regressions and interactions).

Keywords: Data Analytics; Employees; Behavior; Performance; Management; Goals and Objectives; Motivation and Incentives; Analysis;

Citation:

Gallani, Susanna, Jan Bouwens, and Peter Kroos. "Bark Gift Shop Ltd." Harvard Business School Case 120-008, August 2019. View Details

Cite View Details Educators

Faculty & Research

Budgeting, Psychological Contracts, and Budgetary Misreporting

Abstract

Citation:

About the Author

More from the Author