The necessity for constantly increasing efficiency is a basic fact of business life. Budgets are utilized as a pressure device for that purpose. Human Problems with Budgets But because of the effect of budgets on people, they tend to generate forces which in the long run decrease efficiency. By Chris Argyris Budgets are accounting techniques designed to control costs through people. As such their impact is felt by everyone in the organization. They are continuously being brought into the picture when anyone is trying to determine, plan, and implement an organizational policy or practice. Moreover, budgets frequently serve as a basis for rewarding and penalizing those in the organization. Failure to mect the budget in many plants invites much punishment; success, much reward. Because budgets affect people so directly, it seems appropriate to ask ourselves some ques- tions about them. What are the effects of budgets on the human relationships in the organization? How well are budgets accomplish- ing their practical purposes? How can the use of budgets be improved to make them more effective? This article reports some of the results of a pilot study designed to suggest answers to questions like these. Background Information To keep the research problem within man- ageable limits, it was decided to focus primarily on the effects of manufacturing budgets (c.g., Avrmon's Nore: The research which led to thi article wes carried out under the auspices of the Cont tllership Foundation. Dr. Schusler D. Hoslett, Director of Executive Program in Business Administration, Go. production, waste, and error budgets) upon the front-line supervisor. To this end our research group made a field study of three small plants (ie., with less than 1,500 employees) manu- facturing both “custom made” products and products “for stock” — all three of them union- ized and covering the full range from highly skilled to nonskilled workers. (None of the plants, it should be noted, has a supervisory incentive system as part of its budget system.) In one plant we interviewed a 100% sample of front-line supervisors, in another a 90% sample, and in the third a 25% sample, using non- directive questions; and in addition we observed many of the same supervisors in action. Just in case my observations suggest that I have little sympathy for budgets, let me say that any such impression stems from the negative reactions which the interviews themselves pro- duced. This is perhaps inevitable, when one Keeps the following points about budgets in mind: (1) Budgets are, first of all, evaluation instru- ments. Because they tend to set goals against which te measure people, they naturally are complained about. (2) Budgets are one of the few evaluation processes that are always in writing and therefore conerete. Thus, some of the supervisors tend to lumbia University, was in over-all charge of the project. Mr. Frank B. Miller of Cornell University assisted me, ‘The entire research is reported in The Impact of Budgets on People (New York, Controllership Foundation, 1952), 9798 Harvard Business Review use budgets as “whipping posts” in order to release their feclings about many other (often totally un- related) problems. (3) Budgets are thought of as pressure devic As such they produce the same kind of unfavorable reactions as do other kinds of pressure regardless of origin. In fact, the analysis I shall make of the effects of management pressure upon supervisors is not necessarily limited to budgets. For example, a company “saddled” with a domineering executive but which has no budget may well be affected by the same factors as those reported herein. Preparation of Budgets The process of preparing a manufacturing budget is much the same in all plants: Ie usually starts with a meeting of the controller, the assistant controller, and a group of top-manage- ‘ment members to determine over-all financial goals for the company in the forthcoming year. The con- troller’ staff then translates the financial goals into the detailed breakdowns required for departmental budgets. This preliminary budget is then sent to all superintendents, who are asked to scrutinize it carefully and report any alterations they wish to make. During their period of scrutiny, the superinten- dents (middle management) discuss the budget with their own supervisory group in a series of meetings. The first-line foremen donot usually take part in these discussions, although their ideas are requested when the superintendents deem it desirable, ‘Once the superintendents have their budget modifications clearly in mind, a meeting is held with the controller and his ‘staff. Both parties come to the meeting “armed to the teeth” with “ammunition” to back their demands. After the .greements are resolved, all parties sign the new budget proposal. The superintendents return to their offices, awaiting the new budget and the expected drive to “put it over.” So much for background information. Now, let us turn to a discussion of some of the effects budgets seem to have upon people. This discus- sion will be limited to five major areas: (x) the problem resulting from the fact that budgets are used as a pressure device, (2) the problem of the budget supervisor's success and the factory super- visor's failure, (3) the problem of department- centered supervisors, (4) the problem resulting from the fact that budgets are used as a medium for personality expression, and (5) a case ex- ample of human problems related to budgets. In conclusion, some lines of action for manage- ment to follow in meeting these problems will be suggested As a Pressure Device One of the most common of the factory supervisors’ assumptions about budgets is that they can be used as a pressure device to increase production efficiency. Finance people also admit to the attitude that budgets help “keep employees on the ball” by raising their goals and increasing their motivation, The problem of the effects of pressure applied through budgets seems to be at the core of the budget problem. Causes of Pressure Employees believe that pressure from above is due to top management's assumption that most workers are basically or inherently lazy ployees also believe that top management thinks the workers do not have enough motivation of their own to do the best possible job. And first- line supervisors have the same beliefs. Interviews with top-management officials re- vealed that these employee beliefs were not totally unfounded, as a few quotations from some of the top management (both line and finance) make clear: “Tl tell you my honest opinion, About 5% of the people work, 10% of the people think they work, and the other 85% would rather die than work!” ‘GL think there is a definite need for more pressure. People have to be needled a bit. Man is inherently lazy, and if we could only increase the pressure, I think the budget system would be more effective. ‘@ There are lots of workers in this plant, hundreds of them, who don't have the capacity to do things other than what they're doing. And they're lazy! They might be able to develop some capacities, although [ think there are a lot of them who couldn't even if they wanted to, But they don't even have the desire.” Such feelings, even if never openly expressed to the employees, filter through to them in very subtle ways. Once they sense that feelings of this kind exist in top management, they may become very resentful. Some supervisors, who apparently felt that budgets reflected this situa tion, expressed warnings like the following: ©The employees have an established concep- tion of a fair output. Now, if you believe, like mostfinancial people do, that the average worker is out to cheat the company all the time, I give up.” “Managements ought to change their attitudes that employees are out to get them.” ‘© "Well, I guess they think that we need this needling, But I don’t think so.” Effects of Pressure How do people react to pressure? In the three plants studied factory supervisors felt they were working under pressure and that the budget was the principal instrument of pressure. Management exerts pressure on the work force in many ways, of course; budgets are but one way. Being concrete, however, budgets seem to serve as a medium through ‘which the total effects of management pressure are best ex- pressed. As such they become an excellent focal point for studying the effect of pressure on people in a working organization. To help clarify what happens when man- agement “puts on the pressure” let us think of a situation in specific terms: For the sake of illustration, assume that the tech- nical efficiency of a plant is at a maximum and that human efficiency, or effort, has to be increased if Production is to be raised. “The work force of the plant is producing at 70% of its efficiency. Since the level of efficiency is 70%, there must be certain forces which keep it from falling below 70% and certain forces which prevent it from going above 70% Some of the forces which keep it from falling below 70% are: (a) budget talks to foremen; (b) red circling of poor showing of the departments in the budget results; (c) production drives; (d) pep talks by supervisors using budgets as evidence; (e) threat of reprimand if the budget is not met; and (8) threat of feelings of failure if budget is not met. Some of the forces which prevent efficiency from going above 70% are: (a) informal agreements among employees not to produce more; (b) fear of loss of job if efficiency increases; (c) foreman (union) agreements against “speedups"; (d) abilities of individual employees; (c) abilities of work teams as a whole: In our example the level of production is stable; therefore both sets of forces are equal in strength. Suppose that top management decides to increase production. Usually, thought is im- mediately given to adding more factors to those * See Kurt Lewin, “Group Decision and Social Change,” Readings in Social Psychology, edited by Theodore Human Problems with Budgets 99 that help increase production. ‘The logic is that if these forces can be strengthened, they over- come the forces which tend to prevent efficiency from rising, and thereby increase production. Budgets play an important part in this new “push.” Finance people are usually asked to scrutinize all budgets carefully. They are di- rected to cut out all “the lace and niceties” and “get down to essentials.” In short, a new pressure upwards is expressed somewhere in the new budgets in terms of a “tighter” figure, The results may be as expected. Human effi ciency rises, say, 10%, and production is in- creased. A new level of efficiency is stabilized at 80% But actually something else has occurred con- currently with this new push — something which management may not perceive. Since the level of human efficiency has now been stabilized at 80%, presumably factors that keep produc- tion down also have increased until they equal the factors that tend to increase production. Therefore, coupled with an increase in produc- tion, the plant also acquires an increase in forces directed in the opposite direction. People and groups are now trying harder (consciously or un- consciously) to keep production at this new level and prevent it from rising again. Itis not difficult to see what happens. Tension begins to mount. People become uneasy and suspicious. They increase the informal pressure to keep production at the new level. Any new increase will have to be “paid for” by manage- ment in “free” tickets to football games, slow- downs, strikes, ete.! Moreover, management has to work harder to keep the new strength of the forces which tend to drag down efficiency from overwhelming the forces which resulted in increased produc- tion. It will find itself constantly looking for new ideas, new methods to keep the production at the present level. Any slight decrease in pressure on its part will result in an immediate reduction in production. Finally, this constant increasing pressure from top management for greater production may lead to long-term negative results. People living under these conditions tend to become suspi- cious of every new move management makes to increase production, particularly budgets. comb and Eugene L. Hartley (New York, Henry Holt and Co., 1947), especially p. 342-