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

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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.

Working Paper | HBS Working Paper Series | 2020

Nominal and Opportunity Effects of Managerial Discretion

Wei Cai, Susanna Gallani and Jee Eun Shin

We examine the performance consequences of managerial discretion when compensation payoffs are interdependent; that is, when rewards or penalties given to some employees cause others not to get them. Using proprietary data from a company that gives monthly rewards and penalties based on a combination of objective metrics and subjective performance assessments, we document both a nominal and an opportunity effect of managerial discretion. The former refers to performance consequences associated with workers who receive rewards or penalties due to managerial discretion (actual recipients). The latter refers to performance consequences associated with workers who would have received rewards or penalties had there been no managerial discretion (would-be recipients). Our study is, to our knowledge, the first to provide empirical evidence of performance consequences associated with the opportunity effect of managerial discretion. In additional tests, we explore theory-consistent explanations of our results. Our findings contribute to the literature on subjectivity in performance evaluations and have important practical implications for the design of incentive systems.

Keywords: compensation interdependence; nominal and opportunity effects; Managerial Discretion; performance measurement; Employees; Compensation and Benefits; Management; Decisions; Performance; Measurement and Metrics;

Citation:

Cai, Wei, Susanna Gallani, and Jee Eun Shin. "Nominal and Opportunity Effects of Managerial Discretion." Harvard Business School Working Paper, No. 20-075, January 2020. View Details

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Budgeting, Psychological Contracts, and Budgetary Misreporting

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