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The Effects of Budget Levels, Participation, and Repeated-Interaction on Employee Effort
Joseph G. Fisher,
Indiana University
Sean A. Peffer, University of Kentucky
Geoffrey B. Sprinkle, Indiana University
Michael G. Williamson, University of Texas at Austin
ABSTRACT. We use a laboratory experiment to investigate how the level of a budget assigned to an employee affects employee effort. Consistent with reciprocity and fairness models, we find a negative relationship between budget levels and employee effort – many employees responded to a low budget with high effort and a high budget with low effort. We observed higher levels of reciprocal behavior (i.e., lower budgets and higher effort) when the same employee-owner dyad interacted for multiple periods relative to interacting only for a single period. We find that employee participation in the budget-setting process was beneficial (detrimental) to owners when they interacted with employees for multiple periods (only a single period). Collectively, our results help to reconcile the mixed evidence of prior empirical research examining how budget level difficulty and employee participation affect the efficacy of budget-based performance evaluation and reward systems.
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