Budgetary participation and extrinsic rewards: An empirical study of their effect on the motivation and performance of cost centre managers in New Zealand

This thesis examines the impact of budgetary participation and extrinsic rewards on the performance of cost centre managers in manufacturing organisations. It also examines the extent to which motivation intervenes in these relationships. Budgets are often used in the performance evaluation of cost centre managers and their use in this way has been found to affect the behaviour, attitudes and performance of these managers. In some instances, this has resulted in a detrimental effect on the performance of the organisation as a whole. Previous researchers have found that budgetary participation can, in some instances, improve both the motivation and the performance of individuals. Budgetary participation has not, however, always resulted in improved performance; this may be due to the fact that the individuals whose performance is being evaluated are pursuing their own goals. For the organisation to achieve its own goals, it needs to ensure that individuals within the organisation also achieve their goals. To do this, organisations can offer extrinsic rewards to individuals for achievement of the organisational goals and thereby provide a means for individuals to achieve their own goals. It is postulated that budgetary participation will enhance the use of the budget in performance evaluation, as the individuals concerned will be aware of the expectations of the organisation and will also have had input into the process. The provision of extrinsic rewards will provide a goal for individuals to strive for while they are striving to attain the organisational goal. The performance of individuals is linked to the effort which they expend and motivation is what drives individuals to expend effort. It may be contended that budgetary participation and the offer of extrinsic rewards have a positive effect on motivation. This thesis examines whether the use of budgets is beneficial to organisations when individuals are allowed to participate in budget setting and are offered rewards for budget attainment, as well as the role which motivation plays in these relationships. These issues are examined firstly, by reviewing the literature in the field and secondly, by conducting a questionnaire survey of three manufacturing organisations in New Zealand. Questionnaires were received from 64 cost centre managers and three financial controllers. Significant relationships were observed between budgetary participation and extrinsic rewards with both motivation and performance, but no significant relationship was observed between motivation and performance