Accounting, Organizations and Society 43 (2015) 1–16

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Accounting, Organizations and Society

journal homepage: www.elsevier.com/locate/aos

Using negotiated budgets for planning and performance

evaluation: An experimental study q
Markus C. Arnold a, Robert M. Gillenkirch b,⇑
a
Institute for Accounting, University of Bern, 3012 Bern, Switzerland
b
Business Department, University of Osnabrück, 49069 Osnabrück, Germany

a b s t r a c t

Budgets are often simultaneously used for the conflicting purposes of planning and perfor-
mance evaluation. While economic theory suggests that firms should use separate budgets
for conflicting purposes this contrasts with existing evidence that firms rarely do so. We
address two open questions related to these observations in an experiment. Specifically,
we investigate how a planning task that is in conflict with the performance evaluation task
affects behavior in budget negotiations and their outcomes. Additionally, we analyze
whether a single budget can be effectively used for both purposes compared to two sepa-
rate budgets. We develop theory to predict that adding a planning task that is in conflict
with the superior’s performance evaluation task increases the subordinate’s cooperation
in and after the negotiation of a performance evaluation budget. Moreover, we predict that
subordinate cooperation increases even more when the superior is restricted to use a single
budget for both purposes. Our results broadly support our hypotheses. Specifically, we find
that when budgets are used for both planning and performance evaluation, this increases
the subordinate’s budget proposals during the negotiation and his performance after the
negotiation. These effects tend to be even larger when the superior is restricted to a single
budget rather than separate budgets for planning and performance evaluation, particularly
with respect to subordinate performance. In our experimental setting, the benefits of
increased subordinate cooperation even more than offset the loss in flexibility from the
superior’s restriction to a single budget. The results of this study add to the understanding
of the interdependencies of conflicting budgeting purposes and contribute to explain why
firms often use a single budget for multiple purposes.
Ó 2015 Elsevier Ltd. All rights reserved.

Introduction

Budgeting is one of firms’ most important coordination

q
The authors greatly appreciate the helpful comments and suggestions
from Mike Shields (editor) and two anonymous reviewers, as well as from
Ramji Balakrishnan, Lynn Hannan, Tim Mitchell, Steve Salterio, Wim van
der Stede, Ivo Tafkov, seminar participants at the Universities of
Jönköping, Hannover, and Bern, and participants of the 2010 Management
Accounting Section midyear meeting, the 2009 AAA annual meeting, and
the 2009 and 2010 EAA annual meetings. We also thank Achim Hendriks
for his research assistance.
⇑ Corresponding author. Tel.: +49 (0) 541 969 2730.
E-mail addresses: markus.arnold@iuc.unibe.ch (M. C. Arnold),
robert.gillenkirch@uni-osnabrueck.de (R. M. Gillenkirch).
and control mechanisms (Luft & Shields, 2003; Merchant &
Van der Stede, 2011). Usually, budgeting functions are
described as (1) operational planning and coordination,
(2) motivation and performance evaluation, and (3) goal
communication and strategy formulation (Atkinson,
Kaplan, Matsumura, & Young, 2011; Horngren, Datar, &
Rajan, 2011). Thus, budgeting functions encompass both
decision-making and control-oriented purposes of man-
agement accounting information. As these purposes often

http://dx.doi.org/10.1016/j.aos.2015.02.002
0361-3682/Ó 2015 Elsevier Ltd. All rights reserved.
2 M.C. Arnold, R.M. Gillenkirch / Accounting, Organizations and Society 43 (2015) 1–16
conflict (Hopwood, 1972; Libby & Lindsay, 2010; Sprinkle,
2003), budget-setting can present firms with major
challenges.
Our study investigates how a planning task that con-
flicts with the performance evaluation task affects behav-
ior in budget negotiations and their outcomes. In our
setting, the two tasks are in conflict because the need to
provide subordinates with sufficient financial incentives
counters the need for accurate planning and, thus, the
two budgets should be set to different levels. We further
analyze whether a single budget can be effectively used
for the two conflicting tasks as opposed to a separate bud-
get for each task because this restriction may cause more
cooperation in and after the budget negotiations.
Surprisingly little is known about the simultaneous use
of budgets for different purposes and the conflicts arising
from their interaction (Sprinkle, 2003). Prior literature sug-
gests that the budgeting purposes are not determined
independent of organizational characteristics (e.g.,
Moores & Yuen, 2001) and Shields and Shields (1998) find
that uses of budget participation for decision-making and
control-oriented purposes are caused by different antece-
dents. However, most prior studies have focused on perfor-
mance evaluation in isolation and have analyzed
managers’ slack creating incentives (Brown, Evans, &
Moser, 2009; Shields & Shields, 1998; Sprinkle, 2003).1
Only recently have studies begun to more closely analyze
interactions between budgeting functions. For example,
research suggests that flexible budgets may be beneficial
for planning but detrimental for performance evaluation
(Arnold & Artz, 2015; Ekholm & Wallin, 2011; Hansen &
Van der Stede, 2004). Additionally, increased budget diffi-
culty may help with performance evaluation but hurt the
communication function of budgets (Hansen & Van der
Stede, 2004). In contrast, positive externalities may arise
when a firm combines the resource-allocation and
performance-evaluation functions because a subordinate’s
monetary incentives to compete for resources can counter-
act his monetary incentives to create slack arising from
performance evaluation (Fisher, Maines, Peffer, & Sprinkle,
2002).
While the conflict between different budgetary purposes
has been analyzed from an economic perspective (e.g.,
Baiman & Evans, 1983; Christensen, 1982) little is known
about their behavioral effects beyond monetary incentives.
Our study aims to contribute to the understanding of the
effects of budgets used for performance evaluation vs. per-
formance evaluation and planning. Fisher, Mitchell, Peffer,
and Webb (2014a) investigate subordinates’ budget reports
when the superior has a planning task and, in addition to the
division’s net profit, receives payoffs from accurate fore-
casts. They find that subordinates make higher cost reports
when they become aware of the superiors’ additional pay-
offs from increased accuracy but do not participate in them.
In a related paper, Fisher, Mitchell, Peffer, and Webb
(2014b) analyze how a superior’s reliance on cost reports
and her planning task performance depend on her
1
Govindarajan (1986) measures both decision-making and control
dimensions of budgeting but collapses them into a single measure of firm
performance.
monetary incentives for planning accuracy when the sub-
ordinate is not aware of the superior’s planning task.
However, as in their research setting, the subordinate uni-
laterally determines the cost budget they do not investigate
budget negotiations. Moreover, as the superior has no
authority in determining the performance evaluation bud-
get, planning and control are unlikely to be perceived as
conflicting tasks for the superior in their setting.
In our setting, the budgeting purposes of performance
evaluation and planning are in conflict from the superior’s
perspective because the need to provide subordinates with
sufficient incentives to expend effort counters the need for
accurate planning. We compare a condition with only a
performance evaluation task to two conditions with an
additional planning task. In all three conditions, superior
and subordinate negotiate over the budget that is used
for performance evaluation. In the first planning condition,
the superior can set a separate second budget for the plan-
ning task after the negotiation over the performance eval-
uation budget. In the second planning condition, the
superior is restricted to use a single budget for both tasks,
i.e., the planning budget automatically equals the perfor-
mance evaluation budget. As we focus on the subordinate’s
motives beyond monetary incentives, the subordinate’s
compensation function is never affected by the superior’s
planning task.
Because performance evaluation and planning are in
conflict, budgets should be set to different levels in our set-
ting, and so a single budget cannot be used for both tasks
optimally. The superior therefore should be better off
when she can use separate budgets unless this entails sig-
nificant additional costs (Baiman, 1982; Barrett & Fraser,
1977; Churchill, 1984; Hopwood, 1972). This implication,
however, contrasts with empirical evidence (Merchant &
Manzoni, 1989; Umapathy, 1987) that firms rarely use dif-
ferent budgets for different purposes.
We develop theory to predict that with the additional
planning task, the subordinate is likely to perceive that
the superior has a more complex task and to have an
increased interpersonal accountability to the superior,
and that this makes the subordinate more cooperative in
the budget negotiation. We further predict that increased
subordinate cooperation extends to subordinate behavior
after the negotiation, leading to an increase in subordinate
performance in the presence of a planning task, particu-
larly after negotiation impasse. Finally, we also develop
theory to predict that the superior’s restriction to a single
budget can further increase the subordinate’s cooperation
during and after the negotiation.
In our experiment, participants assume the role of
either a superior or a subordinate and negotiate a budget
target for the subordinate’s performance evaluation. After
the negotiation, subordinates perform a real-effort task.
The experiment uses three settings: a baseline setting
where performance evaluation is the sole purpose of bud-
geting, a setting with separate budgets for planning and
performance evaluation, and a setting with a single budget
for both tasks. In the separate-budgets condition, planning
is operationalized by making the superior forecast the sub-
ordinate’s actual performance. In the single-budget condi-
tion, the performance evaluation budget simultaneously
 M.C. Arnold, R.M. Gillenkirch / Accounting, Organizations and Society 43 (2015) 1–16
serves as the superior’s forecast. In both planning condi-
tions, the superior has to bear planning costs if actual per-
formance deviates from predicted performance.
Our results support our predictions. First, the superior’s
planning task increases subordinate cooperation during
the negotiation as evidenced by increased initial sub-
ordinate budget proposals. Second, after controlling for
monetary incentives, subordinate performance increases
in the presence of the planning task, particularly following
negotiation impasse. Third, when comparing the two plan-
ning conditions, the effects on subordinate behavior tend
to be even larger when the superior is restricted to a single
budget, particularly with respect to performance.
The paper makes two primary contributions to the
literature. First, to our knowledge, this is the first study
focusing on the effects of the use of budgets for conflict-
ing purposes on budget negotiations and their outcomes.
We thus respond to the call to investigate the interdepen-
dencies stemming from the simultaneous use of manage-
rial accounting information for decision-making and
control (Sprinkle, 2003). Our results provide evidence that
a superior’s additional task can affect subordinates
beyond monetary incentives in that subordinates coop-
erate more as their impact on the superior’s outcome
increases. Thus, cooperation in budget negotiations is
influenced not only by decreases in social distance
(Fisher, Frederickson, & Peffer, 2006) or by the informa-
tion distribution between the parties (Chalos & Haka,
1989) but also by the set of tasks and the restrictions
the superior has to deal with.
Second, our findings help to reconcile the observation
that firms often use a single budget for multiple purposes
when economic theory predicts that they would employ
separate budgets for planning and control when these pur-
poses are in conflict. Our results suggest that the benefits
from increased subordinate cooperation may compensate
for the loss in flexibility from using a single budget. Thus,
in practice, the use of separate budgets vs. a single budget
will depend on the relative impacts of the two effects,
which implies that firms can profit by taking into account
the effects of social preferences when designing manage-
ment control systems (Church, Hannan, & Kuang, 2012;
Hannan, Rankin, & Towry, 2010).
Setting and benchmark analysis
Setting
Our setting is a modification of the budget negotiation
setting of Fisher, Frederickson, and Peffer (2000). We study
superior-subordinate dyads in which the subordinate pro-
vides real effort. Prior to this effort, the parties negotiate a
budget for the subordinate’s performance evaluation, BEval.
In this baseline setting, the superior has only the perfor-
mance evaluation task (‘‘performance evaluation-only con-
dition’’), and subordinate and superior receive the
following payoffs:
 favorable variances (Horngren et al., 2011; Merchant & Manzoni, 1989), we
F if X 6 BEval
PSubord ¼
F þ A  ðX  BEval Þ if X > BEval
3

DXF if X 6 BEval
PSuper ¼ ð2Þ
D  X  ½F þ A  ðX  BEval Þ if X > BEval
where F is the subordinate’s fixed wage. X is the firm’s out-
put, which equals the subordinate’s actual performance. D
is the contribution margin per unit of output, and conse-
quently D  X is the firm’s contribution margin that is
assigned to the superior. A is the bonus coefficient per unit
of output for exceeding the performance evaluation bud-
get, and A  (X  BEval) is the subordinate’s bonus if X
exceeds BEval. The subordinate’s performance is a function
of his ability and effort, and the superior is not informed
about her subordinate’s ability. Thus, when negotiating
the budget with the subordinate, the superior is uncertain
about the subordinate’s performance potential.
We also investigate two conditions in which the super-
ior has an additional planning task and her planning bud-
get, BPlan, is determined after the negotiation of BEval. BPlan
represents a forecast of actual performance, and deviations
between predicted and actual performance lead to plan-
ning costs for the superior. With the planning task, the
superior receives the following payoff:

D  X  F  C  jX  BPlan j if X 6 BEval
Psuper ¼ ð3Þ
D  X  ½F þ A  ðX  BEval Þ  C  jX  BPlan j if X > BEval
where BPlan is the superior’s forecast of actual performance
X in the production period and C is the coefficient deter-
mining the superior’s planning costs when BPlan does not
perfectly predict actual output. BPlan reflects a planned out-
put, such as the prediction of a sales volume for the instal-
lation of a production capacity, for procurement or supply-
chain coordination (Atkinson et al., 2011, chap. 10). We
study both a condition in which the superior can set a
separate second budget for the planning task after the
negotiation over the performance evaluation budget
(‘‘separate-budgets condition’’) and a condition in which
the superior must use a single budget for both tasks so that
the planning budget automatically equals the performance
evaluation budget (BEval = BPlan: ‘‘single-budget condition’’).
Planning costs emerge from both under- and over-fulfill-
ment of BPlan. If the planning budget is under-fulfilled, then
planning costs can be interpreted as, for example, costs of
unused capacity. If budgets are over-fulfilled, then extra
costs from operating at a level higher than expected arise,
such as, for example, running machines at higher speeds or
acquiring additional production capacity externally.2
According to the superior’s payoff function (3), planning
costs are symmetric in that any deviation of actual output
X from planned output BPlan, whether positive or negative,
is equally costly to the superior.3 We assume that
2
Consistent with prior literature (e.g., Balachandran, Balakrishnan, &
Sivaramakrishnan, 1997; Dunbar, 1971; Fisher, Frederickson, & Peffer,
2002), we refer to the consequences of inaccurate plans as costs because
they represent ex post inefficiencies. Underlying is the perspective that the
superior could plan output optimally if the subordinate did not withhold or
misrepresent private information.
3
While the costs of unfavorable variances may be larger than the costs of
implemented symmetric planning costs in the experiment because the
ð1Þ symmetry in planning costs considerably facilitates the planning task for
the superior and increases experimental control.
4 M.C. Arnold, R.M. Gillenkirch / Accounting, Organizations and Society 43 (2015) 1–16

D  A  C > 0, i.e., the superior always benefits from an budgets can have positive direct but also negative indirect
increase in output, even if this increase also increases the effects on planning accuracy we state a research question
subordinate’s bonus and the planning error. This implies (RQ2, right node) to investigate which forces affect plan-
that the superior has monotonic incentives to both opti- ning accuracy more strongly in our experimental setting.
mally motivate the subordinate and correctly plan
performance.
Benchmark analysis
The subordinate does not bear any planning costs, i.e.,
his payoff function (1) is unaffected by the planning task.4
Before deriving our hypotheses, we analyze the stan-
However, he is always informed about the superior’s plan-
dard economic implications for the setting we have just
ning task and planning costs. That is, at the time of the bud-
described. The superior’s difficulty in setting budgets arises
get negotiation, he is likely to be fully aware of the conflict
from the information asymmetry about the subordinate’s
between the two tasks, of his impact on the superior’s payoff
performance capability. The superior cannot expect the
from the performance evaluation task and, in the planning
subordinate to communicate his ability truthfully because
conditions, of the superior’s costs from planning errors.
his payoff function induces slack-creating incentives
This setting allows us to investigate how a superior’s
(Hansen, Otley, & Van der Stede, 2003; Murphy, 2000).
planning task affects the negotiation of a performance
The subordinate will thus try to decrease his performance
evaluation budget and the outcome of the superiors’ tasks
evaluation budget and will strategically communicate dur-
as well as whether these effects are amplified when the
ing the negotiation.
superior is restricted to use a single budget for planning
The superior’s symmetric planning costs imply that the
and performance evaluation. Fig. 1 summarizes our
optimal planning budget should be set equal to the median
research model and relates our main variables of interest
of the potential performance capabilities from the super-
to the whole budgeting process and its outcomes.
ior’s perspective after the negotiation (Weitzman, 1976).
The upper part of Fig. 1 illustrates our hypothesis and
That means, if the superior cannot infer any additional
research question on negotiation behavior (H1 and RQ1).
information about the subordinate’s capability from the
We propose that the superiors’ planning task motivates sub-
negotiation, then she will set the planning budget equal
ordinates to act more cooperatively during the negotiation
to the median capability according to her ex ante expecta-
and therefore increases initial budget proposals (H1 (i), left
tions. In contrast, if, from the information obtained in the
node) and that the superiors’ restriction to a single budget
negotiation, the superior can narrow the range of the sub-
for both tasks amplifies this effect (H1 (ii), right node).
ordinate’s potential capabilities compared to her ex ante
Further, we analyze superiors’ initial counteroffers to
expectations, then she should optimally set the planning
investigate whether and how the planning task and the sin-
budget to the median corresponding to this smaller range
gle budget restriction influence a superior’s behavior in
of the potential capabilities.
negotiations about performance evaluation budgets beyond
In any case, however, when determining the perfor-
her reactions to subordinate initial proposals. As explained
mance evaluation budget the superior has to take care that
in detail below, the potential direct and indirect effects of
the subordinate has sufficient financial incentives to
the planning task on superiors’ initial counteroffers work
expend effort without increasing the compensation costs
in different directions. We thus state a research question
(too much). If the performance evaluation budget were
(RQ1) to explore which of the effects dominates the super-
equal to the median of potential capabilities (i.e., the opti-
ior’s negotiation behavior in our experimental setting.
mal planning budget), then subordinates could not reach
The lower part of Fig. 1 relates to the outcomes of the
the performance evaluation budget in 50% of the cases.
superiors’ tasks as our second hypothesis and research
This could be optimal only if the superior had extreme
question (H2 and RQ2). Specifically, we propose that the
expectations about potential capabilities.5 Otherwise, the
superior’s planning task makes the subordinate act more
expected loss in subordinate performance due to insufficient
cooperatively also after the negotiation and that this
financial incentives would be too large. Thus, the superior
increases performance, particularly after negotiation
should set the performance evaluation budget below the
impasse (H2 (i), left node). We further propose that this
optimal planning budget (the median capability) to increase
effect is amplified when the superior is restricted to a single
the likelihood of higher effort.6 That means, in our setting,
budget (H2 (ii), right node). H2 focuses on the behavioral
performance evaluation and planning are in conflict because
forces beyond monetary incentives, thereby controlling
of the need to provide subordinates with sufficient mone-
for potentially different performance evaluation budgets.
tary incentives to counter the need for accurate planning.
Finally, we investigate how the single-budget restriction
influences the accuracy of the superior’s planning task. As
5
will be explained below, because the use of separate For example, if the superior expects the task to require some special
skills that half of the subordinates do not possess (i.e., their capabilities are
very low), the cost of reduced effort would be small for this group of
4
The subordinate does not participate in the superiors’ planning costs subordinates. In this case, the performance evaluation budget would be
for two reasons: First, this design choice increases experimental control optimally set close to or even above the median. Assuming that such a large
because it excludes any direct effect of the experimental conditions on the fraction of subordinates is not qualified for their task, though, does not
subordinate’s payoff and because the pay scheme (1) is easily understand- describe corporate practice.
6
able. Second, while there are theoretical analyses of truth-inducing pay This likely corresponds to actual company settings where incentive
schemes in which subordinates directly participate in planning accuracy systems usually provide sufficient monetary incentives for the majority, not
(e.g., Groves & Loeb, 1975; Weitzman, 1976), these pay schemes are rarely the minority, of the employees (Baker, Jensen, & Murphy, 1988; Merchant,
found in practice (Waller & Bishop, 1990). 2010).
 M.C. Arnold, R.M. Gillenkirch / Accounting, Organizations and Society 43 (2015) 1–16
Fig. 1. Research model and predictions.
Because the two budgets should be set to different
levels, the superior is better off when she can use separate
budgets unless this entails significant additional costs. The
reason is that a single budget cannot solve both tasks opti-
mally at the same time (Barrett & Fraser, 1977; Hopwood,
1972; Otley, 1982). Consequently, depending on the rela-
tive importance of the two tasks and on where the single
budget is set, economic theory predicts that the restriction
to a single budget leads to increased costs from suboptimal
planning, suboptimal performance evaluation, or both.
These implications reflect the established result that plan-
ning and performance evaluation are often conflicting bud-
geting purposes (Barrett & Fraser, 1977; Merchant &
Manzoni, 1989; Merchant & Otley, 2007) and economics
theories that predict firms should use separate budgets
for these different purposes (Baiman, 1982; Churchill,
1984).
Hypotheses and research questions
In contrast to the standard economic benchmark analy-
sis, we propose that behavioral factors, beyond monetary
incentives, also influence budget negotiations and subse-
quent performance. We suggest that with the planning
task, the subordinate is likely to perceive that the superior
has a more complex task owing to higher cognitive
demands (Bonner, 1994; Campbell, 1988) and to have an
increased interpersonal accountability to the superior
owing to his increased impact on the superior’s com-
pensation due to the potential planning costs (Kramer,
5
Pommerenke, & Newton, 1993). This is expected to result
in increased subordinate cooperation during and after the
negotiation. The theory we draw on to develop our
hypotheses relies on the existence of only some conflict
between planning and performance evaluation from an
economic perspective and on the subordinate perceiving
this conflict.
Negotiation process
Prior research suggests that a subordinate’s behavior
during and after budget negotiations is affected by fairness
concerns (Chalos & Haka, 1989; Fisher, Maines, et al.,
2002). As fairness concerns are likely to change with the
negotiation setting and with the parties’ interdependence
(De Dreu, Weingart, & Kwon, 2000; Giebels, De Dreu, &
Van de Vliert, 2000), they may be influenced by the super-
ior’s planning task in addition to her performance evalua-
tion task. As pointed out above, a conflicting planning
task likely increases task complexity, thereby making the
superior’s situation more difficult, and also increases the
subordinate’s impact on the superior’s outcome. These
effects are likely to be important in the negotiation as a
factor determining negotiation behavior is an individual’s
accountability to the counterpart (Lerner & Tetlock, 1999;
Tetlock, 1985). Accountability consists of two parts:
responsibility for another person’s outcome and an audi-
ence (a third person or the individual himself) evaluating
the individual’s decision (Lerner & Tetlock, 1999;
Schlenker, Britt, Pennington, Murphy, & Doherty, 1994).
6 M.C. Arnold, R.M. Gillenkirch / Accounting, Organizations and Society 43 (2015) 1–16
With the planning task in addition to the performance
evaluation task during budgeting, the subordinate’s behav-
ior both during and after the budget negotiation increases
his impact on the superior’s outcome and therefore is likely
to increase his interpersonal accountability to the superior
(Kramer et al., 1993; Schlenker et al., 1994). The reason is
that planning quality and thus the superior’s planning
costs depend on her knowledge of the subordinate’s ability
and on his performance after the negotiation. If an individ-
ual’s interpersonal accountability to his or her counterpart
increases, then the individual is likely to cooperate more
and compete less (Kramer et al., 1993; Pruitt, 1981).
Therefore, the subordinate should cooperate more in the
negotiation when the superior has a planning and a perfor-
mance evaluation task.7 Prior research on negotiations in
general (Benton, Kelley, & Liebling, 1972; Carnevale &
Pruitt, 1992) and on budget negotiations in particular
(Fisher et al., 2000; Fisher et al., 2006) suggests that less
extreme initial offers can be regarded as a signal for
cooperation. Thus, we expect the subordinates’ initial bud-
get proposals to increase when there is a planning task in
addition to the performance evaluation task.8
Compared to the case in which the planning task can be
solved through a separate planning budget, the superior’s
restriction to a single budget for both tasks is likely to
increase the subordinate’s interpersonal accountability
even more. In this case, the superior’s ability to solve the
planning task is further restricted because the planning
budget equals the performance evaluation budget. That
means, any decrease in the performance evaluation budget
would not only increase compensation costs but also
automatically increase the superior’s planning costs
because she has no possibility to adjust the planning bud-
get. Consequently, the superior’s restriction to a single
budget for both tasks is likely to reinforce the effect on
the subordinates’ initial proposals. We predict:
H1. The subordinate’s initial budget proposal in the
negotiation (i) increases when the superior has a planning
and performance evaluation task and (ii) further increases
when the superior is restricted to the use of a single budget
for planning and performance evaluation instead of sepa-
rate budgets for each task.
7
Increased cooperation in the negotiation may also incorporate aspects
of strategic behavior. First, the subordinate may make higher offers because
he expects the superior to positively reciprocate his increased cooperation.
Second, the subordinate may anticipate the influence of the planning task
on the superior’s negotiation behavior. For example, if the subordinate
expects the planning task to reduce the superior’s concessions, he may
increase his offers to avoid negotiation impasses. However, whether
cooperation increases due to genuine or strategic concerns is largely
semantic and does not affect our predictions as long as the increase is
systematic. We provide evidence on this question in the supplemental
analysis.
8
Research on bargaining theory shows that a negotiation party can have
incentives to communicate private information when bargaining impasse is
costly to her and when she expects her counterpart to make no or few
concessions (e.g., Ausubel, Cramton, & Deneckere, 2002, chap. 50;
Rubinstein, 1985). In our setting, this might make subordinates’ offers
more informative about their capability when the superior has a planning
task. We provide evidence on this issue in the results section.
In contrast to the effects of planning on subordinate
behavior, the effects on the superior are more ambiguous.
Numerous studies have illustrated the importance of
reciprocity for negotiations (e.g., Brett, Shapiro, & Lytle,
1998; Kuang & Moser, 2009; Putnam & Jones, 1982).
According to the norm of reciprocity, a party will cooperate
during a negotiation if the other party also does so (Benton
et al., 1972; Carnevale & Pruitt, 1992). Thus, if the super-
ior’s planning task makes the subordinate increase his ini-
tial bids, then the superior may reciprocate and this may
lead to lower initial superior counteroffers. Similarly, if
superiors react reciprocally and the single-budget restric-
tion further increases initial subordinate bids, then it
should further decrease initial superior counteroffers.
However, prior research also suggests that the superi-
ors’ counteroffers may be affected by anchoring in two dif-
ferent ways. First, an initial offer can serve as an anchor
that biases the counteroffer (Bazerman & Neale, 1993;
Kristensen & Gärling, 1997). This implies that higher initial
subordinate bids under planning and the additional
increase in the bids under the single-budget case may
increase superiors’ initial counteroffers. Second, anchors
for negotiation offers also may arise from other salient
information (Kahneman, 1992). With an additional plan-
ning task, a likely anchor for the superior’s initial coun-
teroffer is the optimal planning budget given the
superior’s information before the negotiation. As analyzed
above, the optimal planning budget in this case is the med-
ian of the potential performance capabilities according to
the superior’s ex ante expectations. Whether anchoring
on the ex ante optimal planning budget leads to higher
or lower counteroffers is unclear as the direction of the
effect depends on the level of initial counteroffers without
the additional planning task. Yet, in this case, superiors’
initial counteroffers should be concentrated more nar-
rowly around the expected performance capabilities than
without the planning task. As the potential behavioral
forces affecting the counteroffers point into different direc-
tions, we do not derive a directional hypothesis but use the
following research question to investigate which effect
dominates superior behavior in budget negotiations in
our experimental setting:
RQ1: How do the planning task and the restriction to
use a single budget for planning and performance eval-
uation affect a superior’s initial counteroffer in the
negotiation?
Subordinate performance
A characteristic of a budget negotiation is that subse-
quent to the negotiation, the subordinate provides non-
contractible effort. Thus, an important question is the
effect of the negotiation’s procedures and results on sub-
ordinate performance. In the following, we develop theory
to predict that the planning task leads to more subordinate
cooperation not only during, but also after the negotiation.
This increases the subordinate’s performance, particularly
after a negotiation impasse. Further, we expect the
restriction to a single budget for both tasks to reinforce
the effect.
 M.C. Arnold, R.M. Gillenkirch / Accounting, Organizations and Society 43 (2015) 1–16 7

Prior research has shown that reciprocal reactions to justifiable with a single budget as the superior may have
the superior’s negotiation behavior strongly affect sub- no alternative to imposing a budget to keep the planning
ordinates’ effort choices after the negotiation (Fisher, error small. Thus, we predict the following effect of the
Frederickson, et al., 2002; Kuang & Moser, 2011). These planning task and the restriction to a single budget on sub-
reciprocal reactions are more positive when superiors are ordinate performance:
constrained as their intentions are perceived more posi-
tively in this case (Hannan, 2005). Because the presence H2. Controlling for the subordinate’s monetary incentives,
of a conflicting planning task is likely to make the sub- (i) the positive effect of the superior’s planning task
ordinate perceive the superior’s task as more complex beyond a performance evaluation task only on subordinate
and constrained, the planning task can positively affect performance is larger after negotiation impasse than after
subordinate performance. agreement and (ii) the superior’s restriction to a single
We propose, however, that this effect is likely to be budget amplifies this effect.
more pronounced after negotiation impasse than after
agreement for the following reason: If the two parties
Planning error
reach an agreement, then the subordinate’s aspiration level
is likely to be fulfilled (Kuang & Moser, 2011).
As we analyzed above, according to economic theory,
Consequently, although the superior’s negotiation behav-
the possibility of setting separate budgets should reduce
ior is likely perceived as more positive when a planning
the planning error, because the superior does not have to
task is present in addition to the performance evaluation
trade off the conflicting tasks in a single budget.
task, the effect of the planning task on subordinate perfor-
However, from the analysis leading to H1 and H2, the
mance is likely to be smaller under agreement. Prior
effects of the superior’s restriction to a single budget on
research supports this conjecture, showing that, when
her planning error are unclear under both agreement and
agreement is reached, the effects of all treatment condi-
impasse. First, after agreement, the superior cannot further
tions that have been manipulated so far in similar budget
adjust the budget for the planning task in the single-
negotiation settings on subordinate performances have
budget case. In contrast, in the separate-budgets case, the
been small (Arnold, 2015; Fisher et al., 2000; Fisher,
superior can adjust her planning budget, but a reduction
Frederickson, et al., 2002; Fisher et al., 2006).
in planning error may be difficult if the subordinate coop-
In contrast, the effect of the planning task on perfor-
erates less during the negotiation and hides his perfor-
mance is likely to be larger after a budget imposition when
mance capability. Further, as predicted in H1 (ii), the
negotiations fail because the planning task is likely to
subordinates’ initial budget proposals are likely to be
affect the subordinate’s attribution of the superior’s budget
higher when the superior is restricted to a single budget,
imposition and therefore his interpretation of the budget
and this could lead to higher performance evaluation bud-
imposition. Attribution theory suggests that an important
gets under agreement. Consequently, the performance
determinant of an individual’s reaction to another person’s
evaluation budget under agreement may be closer to the
actions is the attribution of that person’s behavior to exter-
subordinate’s actual performance when the superior is
nal (situational) or internal (dispositional) factors (Dobbins
restricted to a single budget.
& Russell, 1986; Gilbert & Malone, 1995; Ross, 1977). In the
Second, after negotiation impasse, the superior has to
unconstrained performance evaluation-only setting, the
trade off planning and performance evaluation in the sin-
subordinate is likely to attribute the superior’s budget
gle-budget case and therefore may not be able to solve
imposition to dispositional factors. Thus, he is likely to per-
the planning task as well as in the separate-budgets case.
ceive a budget imposition as unfair and to respond with
In contrast, the arguments for H2 (ii) imply that sub-
low effort (Fisher et al., 2000; Kuang & Moser, 2011). In
ordinate performance is likely to be lower in the sepa-
contrast, when the superior also has a planning task, the
rate-budgets case. Consequently, if the superior does not
subordinate cannot make unambiguous inferences about
perfectly anticipate the lower performance,9 then the plan-
the superior’s dispositions and may explain her behavior
ning error after negotiation impasse may be larger with
by the situation rather than by disposition (Arnold, 2015;
separate budgets than with a single budget. As the potential
Gilbert & Malone, 1995). That is, a budget imposition
effects of the behavioral forces on planning accuracy point in
may be more acceptable to the subordinate in a setting
different directions, we state a research question to investi-
with multiple budgeting tasks than in the performance
gate which of them dominates in our experimental setting:
evaluation-only task, because the subordinate may attri-
bute the lack of sufficient superior concessions during
RQ2: Will the realized planning error be different under
the negotiation to the superior’s increased task complexity
agreement and disagreement when the superior is
and her focus on the additional planning task. Thus, the
restricted to the use of a single budget than when she
increasing effect of the planning task on subordinate
can set separate budgets?
performance is likely to be larger following a budget
imposition.
Again, the effect of the planning task on performance is
likely to be amplified with a single budget for both tasks 9
Prior experimental evidence shows that decision makers’ abilities to
because the superior is even more constrained and, thus, anticipate the behavior of others in sequential bargaining games are very
her intentions are likely to be perceived even more posi- limited. See, e.g., Binmore, McCarthy, Ponti, Samuelson, and Shaked (2002),
tively. Specifically, a budget imposition may be more Johnson, Camerer, Sen, and Rymon (2002).
8 M.C. Arnold, R.M. Gillenkirch / Accounting, Organizations and Society 43 (2015) 1–16
Experimental method
Participants and design
180 graduate and undergraduate students from a large
European university (90 dyads) participated in the experi-
ment—60 participants (30 dyads) in each of the three treat-
ments. Of the participants, 42% were female, and 59% were
business or economics majors. Three sessions were con-
ducted for each of the treatments. No participant partici-
pated in more than one session. Sessions lasted between
60 and 75 min. Participants received a show-up fee of €
5.00 and additional variable compensation. Average total
compensation was €14.34 and varied between €5.00 and
€23.80.
We used a nested experimental design in which we var-
ied (between subjects) the existence of a planning task—
present or absent. Nested within the planning task present,
we manipulated the restriction to use a single budget for
both purposes—present or absent. In all treatments, bud-
gets had a performance evaluation function. This nested
design resulted in three treatments: performance evalua-
tion only, separate budgets for planning and performance
evaluation (‘‘separate-budgets treatment’’), and a single
budget for planning and performance evaluation (‘‘single-
budget treatment’’). The experimental design is summar-
ized in Fig. 2.
The planning task was operationalized by having the
superior predict output, i.e., actual performance, or not.
With the planning task, the superior had to bear planning
costs if actual output deviated from predicted output, as
included in Eq. (3).
The restriction to a single budget was manipulated by
giving the superior the ability to set separate budgets for
performance evaluation and planning or not. That is, in
the single-budget treatment, the planning budget
automatically equaled the performance evaluation budget.
The subordinate’s payoff function was never affected by
any manipulation. However, as the subordinate’s financial
incentives after the negotiation depended on the perfor-
mance evaluation budget, we control for these incentives
in our statistical analysis.
Procedure
The experiment, including the negotiation process, was
computerized. Instructions appeared on the computer
screens and were simultaneously read aloud.10 The experi-
mental procedure consisted of the following steps:
(1) Upon arrival, participants were randomly assigned
to computer terminals and were separated from
each other by panels. Superior and subordinate were
paired anonymously and randomly.
10
The instructions used context-free language. Moreover, to avoid that in
the planning conditions, one task was framed as profit increasing, and the
other was framed as profit decreasing, we treated the effects of the two
tasks always identically. The instructions are available from the authors
upon request.
(2) Then, the real effort task was explained. It consisted
of decoding two-digit numbers into letters in blocks
of two each. Participants then completed a two-min-
ute practice round.
(3) Next, all subjects completed three four-minute
training rounds. New decoding keys were dis-
tributed for each round. Subordinates were told that,
at the end of the experiment, one of the training
rounds would be randomly selected and they would
receive two points for every block correctly decoded
in this round. Subordinates were informed of the
number of correctly and incorrectly decoded blocks
after each training round. They improved their per-
formance on average by 2.18 blocks from training
rounds 1–2 and by 1.56 blocks from training rounds
2–3. Superiors were not compensated and received
no feedback in the training rounds.
(4) After the third training round, subordinates were
asked to submit a best estimate of the number of
blocks they could correctly decode in another four-
minute work round. On average, the estimate was
larger by 0.34 blocks than the maximum perfor-
mance in the training rounds.
(5) Next, participants were informed about their roles,
the setting, the payoff functions, and the budgeting
process in the experimental work round. The
parameter values were set to F = 250, A = 4, D = 10,
and C = 4.11 They guarantee that the superior has
monotonic incentives to motivate high subordinate
performance and predict this performance accurately.
Specifically, for a given subordinate performance, any
unit of deviation of the planning budget decreases
the superior’s payoff by C = 4. Further, for a given
planning budget, the superior’s payoff increases mono-
tonically if subordinate performance increases. That
is, even if an increase in subordinate performance
increased both compensation and planning error,
the net effect on the superior’s payoff would still be
positive (D  A  C = 2). A and C were chosen to avoid
a parameter-specific focus on one of the tasks: With
A = C, an increase in compensation is as costly as an
increase in planning error. The values of A and C are
large enough to make the superior pay sufficient
attention to both tasks. Participants were informed
that the negotiation would last at maximum three
rounds and that the superior would set the final per-
formance evaluation budget if no agreement was
reached at the end of the third round. In the single-
budget treatment, participants were further told that
the planning budget would be equal to the perfor-
mance evaluation budget. In every negotiation round,
the subordinate made the initial budget proposal, and
the superior made the counteroffer, which resembles
the structure of budgeting negotiations in practice
(Anthony & Govindarajan, 2007; Umapathy, 1987).
11
The minimum compensation for the subordinates was F. To avoid
having to pay the fixed wage from their own resources, superiors were
endowed with 500 points. The remaining 250 points after the deduction of
F ensured that the superior would have sufficient planning incentives even
in the case of low subordinate performance.
 M.C. Arnold, R.M. Gillenkirch / Accounting, Organizations and Society 43 (2015) 1–16
Performance evaluation only
(Treatment 1)
Superior has only a Superior has a planning and a performance evaluation task
performance evaluation task
Superior can use separate
budgets for each task
BEval
Fig. 2. Overview of the experimental setting and design.
(6) Subjects then answered a quiz about the procedures
and the payoffs. The quiz included questions about
the planning budget (planning treatments only)
and the performance-evaluation budget (all treat-
ments). These questions were correctly answered
in 92% of all cases in the first trial. Participants fail-
ing to give a correct answer had to read the relevant
instructions again. The experiment did not start
until all participants had answered all questions
correctly.
(7) Before the negotiations started, all participants were
informed of the results of a pretest. They were told
that 80% of the participants in the pretest had cor-
rectly decoded between 29 and 49 blocks of num-
bers in four minutes. No superior was informed
about the performance of her specific subordinate
in the training rounds.
(8) Next, negotiations were conducted between superi-
ors and subordinates via the computer network.
This procedure ensured anonymity and removed
any interpersonal aspects of the negotiation. At any
point in the negotiation, either party could accept
the other party’s proposal, which would end the
negotiation. If the superior and subordinate could
not reach an agreement within three rounds, then
the superior imposed the budget.
(9) After the performance evaluation budget was set,
each superior set the planning budget in the
separate-budgets treatment. Subordinates were not
informed about the planning budget so as not to
affect their performance by presenting an additional
goal. This is consistent with the informal adjustment
of performance evaluation targets for planning pur-
poses observed in practice (Berry and Otley, 1975;
Walker & Johnson, 1999). In the single-budget treat-
ment, the planning budget automatically equaled
the performance evaluation budget.
(10) Finally, subordinates completed the experimental
work round for four minutes. Subjects interacted
for only one work round to avoid ambiguities
that may arise in repeated relationships, such as
reputation building and aspects of the social
interaction. At the end of the work round, subjects
were informed of the subordinate performance
and the payoffs. They completed a post-
experimental questionnaire and received their cash
payments.
9
Planning and performance evaluation
Separate budgets Single budget
(Treatment 2) (Treatment 3)
Superior is restricted to use a
single budget for both tasks
BEval and BPlan BEval = BPlan
Measures
To analyze the negotiation process, we use FIRSTBID,
the subordinate’s initial budget proposal in the negotia-
tion, and FIRSTCOUNTER, the superior’s initial counterof-
fer. BEval and BPlan represent the performance evaluation
and the planning budget, respectively. X is the sub-
^ is the subordinate’s
ordinate’s actual performance, and X
estimate of his performance capability at the end of the
training rounds. BONUSPot ¼ maxf0; 4  ðX^  BEval Þg repre-
sents the potential subordinate bonus based on his esti-
mated performance capability and is used to control for
the subordinate’s monetary incentives. ERROR = |X  BPlan|
is used to measure the planning error. Table 1 summarizes
the measures used in the experiment.
Results
Table 2 displays descriptive statistics and shows that
the subordinates’ estimated performance capabilities X ^
are very similar across treatments. One-way ANOVAs show
no significant difference across treatments with respect to
the subordinates’ estimates and the subordinates’ maxi-
mum performances in the training round (p > .10 in both
cases). Thus, differences across treatments are not driven
by differences in performance capabilities.
As our goal is to establish a conflict between planning
and performance evaluation, we examine the means of
BPlan and BEval. Table 2 shows that, in the separate-budgets
treatment, mean BEval is lower than mean BPlan and this dif-
ference is significant (t-test, x ¼ 35:07 vs. 38.70, t = 3.11,
p < .01).12 63% of the superiors adjusted the planning budget
upwards, consistent with the economic benchmark analysis.
In contrast, 27% of the superiors adjusted the planning bud-
get downwards. The majority of these cases (eight of nine)
occurred after a negotiation impasse, and the mean perfor-
mance evaluation and planning budget in these cases are
36.85 and 32.57, respectively. This result suggests that,
when setting their planning budget, some superiors allowed
for the possibility that subordinates might reduce perfor-
mance after a budget imposition. However, our finding that
90% of the superiors adjusted the planning budget confirms
12
We use one-tailed p-values for tests of directional predictions and two-
tailed p-values for research questions without directional prediction. The
unit of observation is the observation made for every dyad.
10 M.C. Arnold, R.M. Gillenkirch / Accounting, Organizations and Society 43 (2015) 1–16

Table 1 experiment, performance evaluation seems to be more

Summary of the measures used in the analysis. important for superiors than planning.13
Measure Description
FIRSTBID Subordinate’s initial budget
Hypotheses tests
proposal
FIRSTCOUNTER Superior’s initial counteroffer
BEval Performance evaluation H1 predicts (i) an increase in initial budget proposals in
budget the planning treatments and (ii) an additional increase in
BPlan Planning budget the single-budget relative to the separate-budgets treat-
X Subordinate performance
ment. Consistent with these two predictions, Table 2 and
^
X Subordinate’s estimate of his
performance capability Fig. 3 show that the mean of FIRSTBID is higher in the
^  BEval Þg
BONUSPot ¼ maxf0; 4  ðX Potential subordinate bonus two planning treatments than in the performance evalua-
based on the subordinate’s tion-only treatment (H1 (i)) and is higher in the single-
estimated performance
budget treatment than in the separate-budgets treatment
capability
ERROR = |X  BPlan| Realized planning error
(H1 (ii)).
We conduct a nested ANOVA with FIRSTBID as the
dependent variable to test H1. The first factor in the
ANOVA is whether the planning task is present or absent.
the success of our manipulation of conflict between the This factor tests part (i) of H1. Nested within this factor,
performance evaluation and the planning tasks. the second factor captures whether the superior is
Finally, Table 2 reveals that the mean of single budget is restricted to a single budget. This factor tests part (ii) of
close to and not significantly different from the mean of H1. As reported in Panel A of Table 3, planning significantly
BEval in the separate-budgets case (t-test,  x ¼ 35:76 vs. affects FIRSTBID (p = .03). However, even though the effect
35.07, t = .50, p > .10) but significantly lower than BPlan of the single budget on FIRSTBID is in the predicted direc-
(t-test, 
x = 35.76 vs. 38.70, t = 2.22, p = .03). Thus, in our tion the nested term is not significant at conventional
levels (p = .13). These results support part (i) of H1 but
not part (ii).14
Table 2
RQ1 asks how the planning task and the restriction to a
Descriptive statistics: mean and standard deviation.
single budget affect superiors’ initial counteroffers. Table 2
Performance Planning and performance and Fig. 3 show that mean FIRSTCOUNTER is very similar
evaluation only evaluation across treatments and slightly above the mid-point (39)
Separate Single of the pre-test span (29–49) participants were informed
budgets budget about. We ran a nested ANOVA and a nested ANCOVA with
(Treatment 1) (Treatment 2) (Treatment 3)
FIRSTCOUNTER as the dependent variable and the same
^a
X 41.67 38.53 40.23 factors as used for testing H1 to test whether the
5.08 6.30 6.56 planning task affects FIRSTCOUNTER. In the ANOVA,
BEvalb 32.33 35.07 35.76
11.67 5.95 4.77
we test the overall treatment effects. In the ANCOVA,
BPlanc n.a. 38.70 35.76 we include FIRSTBID as a covariate to examine whether
n.a. 5.45 4.77 superior counteroffers are driven by reciprocity or
BONUSPotd 43.47 20.27 23.60 anchoring on subordinates’ initial bids. If superiors react
41.39 19.95 25.13
reciprocally, then increases in FIRSTBID should decrease
FIRSTBIDe 19.93 22.20 24.53
8.79 8.15 6.28 FIRSTCOUNTER. In contrast, if superiors anchor
FIRSTCOUNTERf 40.53 40.27 41.67 on FIRSTBID, increases in FIRSTBID should increase
17.20 6.99 8.66 FIRSTCOUNTER. Panel B of Table 3 reports the results.
Xg 30.80 28.87 37.00 They do not reveal any significant effect in the ANOVA or
19.21 19.19 14.71
ERRORh n.a. 14.10 12.83
the ANCOVA (p > .25 in all cases). That is, we find neither
n.a. 15.88 11.68 a significant effect of the treatment conditions nor of
No. of obs. 30 30 30
FIRSTBID. This lack in significant results contradicts the
view that superiors reciprocate or anchor on the sub-
Note: Mean and standard deviation for the performance evaluation-only ordinates’ initial bids.
condition (Treatment 1), planning and performance evaluation with
separate budgets (Treatment 2), and planning and performance evalua-
tion with a single budget (Treatment 3).
a ^
X is the subordinate’s estimate of his performance capability. 13
This finding is consistent with the perception of performance evalua-
b
BEval is the budget used for performance evaluation. tion as central in practice (e.g., Otley, 1978). However, it may not be
c
BPlan is the budget used for planning. In the single-budget case, BPlan generalizable because the optimal single budget also depends on the
automatically equals BEval. parameters A and C.
d
BONUSPot is the potential bonus the subordinate can earn based on his 14
We find no evidence consistent with subordinates’ budget proposals
estimated performance capability X. ^
revealing more about their capabilities in the planning conditions. Specifi-
e
FIRSTBID is the subordinate’s initial budget proposal in the cally, regression analyses show that the increase in budget proposals in the
negotiation. planning conditions varies neither linearly nor non-linearly (inversely
f
FIRSTCOUNTER is the superior’s initial counteroffer in the negotiation. U-shaped) with subordinates’ capabilities. These results contradict that the
g
X is the subordinate performance in the experimental work round. increased budget proposals are driven by an increased informativeness of
h
ERROR = |X  BPlan| is the realized planning error. subordinate offers.
 M.C. Arnold, R.M. Gillenkirch / Accounting, Organizations and Society 43 (2015) 1–16 11

Finally, a test of superiors’ anchoring on the ex ante

optimal planning budget requires a measure of the concen-
tration of FIRSTCOUNTER around the mid-point of the pret-
est span. Therefore, we used the standard deviation of
FIRSTCOUNTER. Table 2 reveals that the standard deviation
is much smaller in both planning treatments than in the
performance evaluation-only treatment, and this decrease
in standard deviation of FIRSTCOUNTER in the two plan-
ning treatments relative to the performance evaluation-
only treatment is significant (Bartlett’s test, v2 > 12,
p < .01 in both cases). This result is consistent with the
notion that in our experimental setting, superiors form
an a priori expectation about subordinates’ performance
capabilities and anchor on this expectation when a plan-
ning task is present.
H2 predicts that, after controlling for monetary incen-
tives, the superior’s planning task in addition to her perfor- Fig. 3. Subordinates’ initial budget proposals and superiors’ initial
mance evaluation task leads to a larger increase in counteroffers. Note: The figure displays subordinates’ average initial
budget proposal in the negotiation (FIRSTBID) and superiors’ average
subordinate performance after negotiation impasse than initial counteroffer (FIRSTCOUNTER) for the three experimental condi-
after agreement (H2 (i)). It further predicts that this effect tions (performance evaluation-only, planning with separate budgets, and
is amplified when the superior is restricted to a single bud- planning with a single budget).
get (H2 (ii)). Panel A of Table 4 displays the descriptive
statistics for subordinates’ performances contingent on
negotiation agreement. Fig. 4 graphs the performances Table 3
relative to the estimated performance capabilities in all Analysis of subordinates’ initial budget proposals and superiors’ initial
counteroffers.
experimental treatments. Table 4 and Fig. 4 show that
mean performance increases in the separate-budgets treat- df MS F p
ment relative to the performance evaluation-only treat- Panel A: FIRSTBID a

ment and further increases in the single-budget Planning 1 235.76 3.86 0.03
treatment. As predicted, both effects are mainly driven Single budget|planning 1 81.67 1.34 0.13
Error 87 61.04
by the changes after budget impositions, whereas after
agreement the performances are similar across treatments. Panel B: FIRSTCOUNTERb
To test H2, we run regressions with the subordinate ANOVA
performance, X, as the dependent variable.15 We use Planning 1 3.75 0.03 0.87
regressions instead of ANOVAs because a Levene test indi- Single budget|planning 1 29.40 0.21 0.65
Error 87 139.90
cates a violation of variance homogeneity (t = 22.69,
p < .01). In the regressions, we control for heteroscedasticity ANCOVA
FIRSTBID 1 174.21 1.25 0.27
by using the Huber–White estimator. To test the interaction Planning 1 0.68 <0.01 0.94
predicted by part (i) of H2, we regress X on BONUSPot, an Single budget|planning 1 14.11 0.10 0.75
indicator variable for planning (DPlan equal to 1 in the plan- Error 86 139.51
ning treatments and 0 in the performance evaluation-only Note: Panel A reports results of a nested ANOVA testing whether planning
treatment), an indicator variable for agreement (agree equal and the restriction to a single budget nested within planning affect sub-
to 1 when agreement was reached and 0 when the negotia- ordinates’ initial budget proposals in the negotiation. Panel B shows a
tion failed), and the interaction of the two indicator vari- nested ANOVA and a nested ANCOVA testing whether planning and the
restriction to a single budget affect superiors’ initial counteroffers in the
ables. To test part (ii) of H2, we include only the two
negotiation. The nested ANCOVA includes the subordinates’ initial pro-
planning treatments and regress X on BONUSPot, Agree, an posals as a covariate. p-values are one-tailed for directional predictions
indicator variable for the singe-budget treatment (DSingle and two-tailed otherwise.
a
equal to 1 in the single-budget treatment and 0 in the sepa- FIRSTBID is the subordinate’s initial budget proposal in the
rate-budgets treatment), and the interaction of the two indi- negotiation.
b
FIRSTCOUNTER is the superior’s initial counteroffer in the negotiation.
cator variables. In the regressions, BONUSPot controls for the
effect of monetary incentives. Panel B of Table 4 reports the
results.
Consistent with H2 (i) and (ii), the interaction coeffi- Model (1), the interaction coefficient indicates that the
cients are significantly negative in both regressions. In increase in subordinate performance (X) under planning
is smaller after agreement (b = 7.95, p = .09). This
supports H2 (i). In Model (2), the interaction coefficient
15
The use of X in the tests of H2 assumes that different performance indicates that the increase in X in the single budget-
capabilities are controlled by random assignment of the subordinates to the treatment is smaller after agreement (b = 11.10, p = .04).
treatment conditions. All statistical inferences remain the same if perfor-
^ as an This result supports H2 (ii).
mance capabilities are directly controlled by either including X
additional control variable or by using the performance relative to the Moreover, the regressions allow analyzing separately
performance capability (X/X) ^ as the dependent variable. whether the changes in X are significant both under
12 M.C. Arnold, R.M. Gillenkirch / Accounting, Organizations and Society 43 (2015) 1–16

agreement and negotiation impasse. First, the baseline Table 4

condition of Model (1) is the performance evaluation-only
treatment after negotiation impasse. Thus, the coefficient
of DPlan reveals that after negotiation impasse, X increases
significantly under planning relative to performance eval-
Effects of the planning task and the restriction to a single budget on
subordinate performance.
Panel A: Descriptive statistics for Xa. Mean, standard deviation, and
number of observations

uation-only (b = 10.37, p = .03). In contrast, a subsequent Performance Planning and performance

Wald-test combining the coefficients of DPlan and the evaluation only evaluation

interaction term in Model (1) reveals that the increase in Separate Single
X in the planning treatments is not significant after agree- budgets budget
(Treatment 1) (Treatment 2) (Treatment 3)
ment (b = 10.37–7.95 = 2.42, p = .20). Second, the baseline
condition of Model (2) is the separate-budgets treatment Negotiation 44.14 41.25 42.18
agreement 4.05 5.26 6.67
after negotiation impasse. Thus, the coefficient of DSingle
14 8 11
shows that X increases significantly in the single-budget
Negotiation 19.13 24.36 34.00
treatment after negotiation impasse (b = 10.08, p = .04).
impasse 19.68 20.48 17.26
However, a Wald-test in Model (2) combining the coeffi- 16 22 19
cients of DSingle and the interaction term shows that there
is no significant increase in X in the single-budget treat- Panel B: Regression analysis. Coefficient (p-value)
Model (1) All (2) Planning conditions
ment after agreement (b = 10.08–11.10 = 1.02, p = .68).
conditions only
Thus, the increasing effects of the planning task and the Dependent Xa Xa
restriction to a single budget on performance are only variable
prevalent after negotiation impasse. BONUSPotb 0.13 (0.01) 0.16 (0.05)
RQ2 asks whether the planning error with a single bud- Agree (0/1)c 18.94 (<0.01) 15.85 (<0.01)
get is different from the planning error with separate bud- DPlan (0/1)d 10.37 (0.03)
gets under agreement and impasse. As reported in Panel A Agree  DPlan 7.95 (0.09)
DSingle (0/1)e 10.08 (0.04)
of Table 5, mean ERROR is larger after agreement in the
Agree  DSingle 11.10 (0.04)
single-budget treatment than in the separate-budgets Constant 16.15 (<0.01) 21.37 (<0.01)
treatment ( x = 9.00 vs. 4.63). After negotiation impasse Adj. R2 0.25 0.16
and in total, mean ERROR is smaller in the single-budget N 90 60
treatment (disagreement:  x = 15.05 vs. 17.55, overall: Note: Panel A shows means, standard deviations, and numbers of obser-

x = 12.83 vs. 14.10). Panel B reports the results of two lin- vations for performance evaluation-only (Treatment 1), planning and
ear regressions run to investigate RQ2. Both regressions performance evaluation with separate budgets (Treatment 2), and plan-
ning and performance evaluation with a single budget (Treatment 3),
use ERROR as the dependent variable. The first regression contingent on whether agreement was reached during the negotiations.
uses the indicator variable DSingle for the single-budget Panel B shows the results of two linear regressions testing whether, after
treatment and analyzes whether the total difference in controlling for the effect of monetary incentives (BONUSPot), planning and
ERROR between the two planning treatments is significant. the restriction to a single budget affect subordinate performance differ-
ently after negotiation agreement and negotiation impasse. The regres-
The second regression uses DSingle, the indicator variable
sion uses Huber–White robust standard errors. p-values are one-tailed for
for agreement (Agree), and their interaction as indepen- directional predictions and two-tailed otherwise.
dent variables to investigate differences in ERROR sepa- a
X is the subordinate performance in the experimental work round.
b
rately for agreement and disagreement. As a Levene test BONUSPot is the potential bonus the subordinate can earn based on his
estimated performance capability X. ^
indicates a violation of variance homogeneity (t = 10.11, c
Agree is an indicator variable equal to 1 if the parties reached
p < .01), we use the Huber–White estimator to calculate agreement in the negotiation and 0 else.
standard errors. d
DPlan is an indicator variable equal to 1 in the two planning condi-
The first regression indicates a negative but insignifi- tions and 0 else.
e
cant coefficient for the single-budget treatment DSingle is an indicator variable equal to 1 in the single-budget con-
dition and 0 else.
(b = 1.27, p = 0.73), which contradicts the economic pre-
diction that the planning error should increase when only
a single budget is used. In the second regression, disagree- Supplemental analysis
ment in the separate-budgets case represents the baseline
condition. The results show that the use of a single budget To support our main analyses we conduct several sup-
leads to insignificantly lower planning errors after dis- plemental analyses. The results are presented in the
agreement (b = 2.49, p = .61), but a subsequent Wald test Appendix and summarized in the following. First, we ana-
combining the coefficients of DSingle and the interaction lyze subordinates’ last budget proposals in the negotiation
term reveals that the use of a single budget increases the and find that they are significantly higher in the two plan-
planning error under agreement (b = 2.49 + 6.87 = 4.38, ning treatments than in the performance evaluation-only
p = .09). These results show that, even though 90% of the treatment. As the evidence on RQ1 had shown that superi-
superiors in the separate-budgets case adjusted their ors do not decrease their counteroffers in the planning
planning budgets relative to the performance evaluation treatments, this result supports our conjecture that
budget, the benefits of using separate budgets for planning increases in initial subordinate bids in the planning treat-
are limited and only occur after agreement. ments are driven by genuine cooperativeness and not by
 M.C. Arnold, R.M. Gillenkirch / Accounting, Organizations and Society 43 (2015) 1–16 13

Table 5
Analysis of the planning error.

Panel A: Descriptive statistics for ERRORa. Mean, standard deviation,

and number of observations
Planning and performance evaluation
Separate budgets Single budget
(Treatment 2) (Treatment 3)
Negotiation 4.63 9.00
agreement 5.04 6.34
8 11
Negotiation 17.55 15.05
impasse 17.12 13.53
22 19
Total 14.10 12.83
15.88 11.67
30 30
Panel B: Regression analyses. Coefficient, (p-value)
Model (1) (2)
Fig. 4. Subordinate performance relative to estimated performance
Dependent ERRORa ERRORa
capability. Note: The figure displays subordinates’ average performances
variable
relative to their estimated capabilities for the three experimental
conditions (performance evaluation-only, planning with separate bud- DSingle (0/1)b 1.27 (.73) 2.49 (.61)
gets, and planning with a single budget). Agree (0/1)c 12.92 (<.01)
Agree  DSingle 6.87 (.22)
Constant 14.10 (<.01) 17.55 (<.01)
Adj. R2 0.00 0.06
strategic attempts to elicit lower counteroffers. Second,
N 60 60
also in line with increased subordinate cooperation in the
negotiation under planning, we find that performance Note: Panel A shows means, standard deviations, and number of obser-
vations for performance evaluation-only (Treatment 1), planning and
evaluation budgets after agreement are significantly higher
performance evaluation with separate budgets (Treatment 2), and plan-
in the planning treatments than in the performance eval- ning and performance evaluation with a single budget (Treatment 3),
uation-only treatment. contingent on whether agreement was reached during the negotiations.
Third, we ran an additional treatment (with N = 20 Panel B shows the results of two linear regressions testing whether the
dyads) in which the subordinate knew that the superior restriction to a single budget affects the planning error (ERROR). The
regressions use Huber–White robust standard errors. p-values are one-
had a second task in addition to the performance evalua- tailed for directional predictions and two-tailed otherwise.
tion task but did not know that it was a planning task lead- a
ERROR is the realized planning error.
ing to planning costs. Apart from that, the additional b
DSingle is an indicator variable equal to 1 in the single-budget con-
treatment was identical to the separate-budgets condition dition and 0 else.
c
Agree is an indicator variable equal to 1 if the parties reached
and the results are qualitatively similar. Specifically, in the
agreement in the negotiation and 0 else.
additional treatment, subordinates’ initial budget propos-
als and their performance after negotiation impasse are
significantly higher than in the performance evaluation-
only treatment. These results suggest that increasing the in budget negotiations and their outcomes. We further
complexity of the superior’s budgeting tasks can increase analyze whether a single budget can be effectively used
subordinate cooperation during and after budget negotia- for these two conflicting tasks as opposed to two separate
tions independent of the subordinate’s exact knowledge budgets because this restriction may cause more coopera-
of the task and its consequences. This supports the theory tion during and after the budget negotiations. We find that
underlying H1 and H2. the superior’s additional planning task enhances sub-
Finally, we investigate superiors’ and subordinates’ pay- ordinate cooperation during and after budget negotiations.
offs to shed further light on the consequences of the single- Specifically, the planning task increases the subordinate’s
budget restriction in our experimental set-up. Even though initial budget proposal and, even after controlling for
the benchmark analysis indicates that due to a loss in flexi- monetary incentives, increases his performance after the
bility, the superior’s return should be lower with a single negotiation. The effects tend to be even larger if the super-
budget than with separate budgets, we find that it is sig- ior is restricted to a single budget for both tasks, particu-
nificantly higher in the single budget treatment after larly with respect to performance. Our findings
negotiation impasse and not significantly different after contribute to the literature by demonstrating how an addi-
agreement. The same also holds for the subordinate payoff. tional superior budgeting task can affect subordinate
This indicates that increased subordinate cooperation behavior. Thus, we respond to Sprinkle’s (2003) call for a
under a single budget can benefit subordinate and superior better understanding of the simultaneous use of manage-
and, in our set-up, more than offsets the loss in flexibility. ment accounting information for decision-making and
control. We also provide evidence that not only decreases
Conclusion and discussion in social distance (Fisher et al., 2006) or the information
distribution between the parties (Chalos & Haka, 1989)
This study investigates how a planning task that con- affects cooperation in budget negotiations but also the
flicts with a performance evaluation task affects behavior set of tasks and the restrictions the superior has to deal
14 M.C. Arnold, R.M. Gillenkirch / Accounting, Organizations and Society 43 (2015) 1–16
with. Despite the support for our hypotheses, however, our
findings may be limited in the sense that we have no direct
measures of the mediating variables (task complexity,
interpersonal accountability, fairness perceptions, and the
attribution of the superior’s decisions) underlying our
theoretical development.
Furthermore, we find evidence that the superior’s
restriction to a single budget for both planning and perfor-
mance evaluation increases subordinate cooperation even
further. In our experimental setting, the increased coopera-
tion even more than offsets for the loss in flexibility from
the restriction. This evidence may contribute to explain
the inconsistency between theoretical suggestions to use
multiple budgets for multiple tasks and empirical observa-
tions that firms rarely do so. Even though we used a setting
without additional costs of a second budget, the existence
of such additional costs would represent a further draw-
back of the use of separate budgets. Thus, in practice, the
use of separate budgets vs. a single budget may depend
on a more complex trade-off between economic and
behavioral costs and benefits than suggested by standard
economic theory. This trade-off likely also depends on
the firm’s environment, including the costs of inaccurate
planning and reduced performance. Consistent with our
results, though, existing empirical evidence suggests that
less conflict in negotiations is associated with better out-
comes of performance evaluation and planning tasks
(Hansen & Van der Stede, 2004; Libby & Lindsay, 2013).
Future research could investigate the conditions in which
firms rely on separate budgets for multiple tasks or a single
budget for multiple tasks to gain more insight into how
these benefits and costs play out in practice.
Finally, evidence on our research questions indicates
that in the planning conditions, superiors anchor on plan-
ning budgets during the negotiation (RQ1) and that sepa-
rate budgets do not even decrease planning costs
consistently compared to a single budget despite the addi-
tional flexibility (RQ2). These findings may be less general-
izable than the evidence on our hypotheses because we
cannot exclude that the underlying theoretical forces
may play out differently in other settings. Nevertheless,
the findings on RQ1 provide initial evidence that even if
separate budgets are used, planning budgets may have
strong effects on superiors’ behavior in negotiations about
performance evaluation budgets. Moreover, the findings on
RQ2 provide initial evidence that the use of separate bud-
gets may not lead to better planning outcomes thereby
contradicting suggestions in the prior literature (e.g.,
Barrett & Fraser, 1977). These limitations also suggest that
additional research is needed to gain further insights into
the planning function of budgeting and its interaction with
the control function.
Another limitation of this study may be that while the
existence of a conflict between multiple budgeting func-
tions in practice is well established (Barrett & Fraser,
1977; Merchant & Manzoni, 1989; Merchant & Otley,
2007), the degree of conflict also depends on the relative
importance of the two tasks. Similarly, assuming symmet-
ric planning costs helps to increase experimental control,
but in practice, planning costs are likely to be asymmetric,
which may lead to a smaller gap between the two optimal
budget levels. Importantly, however, our hypotheses can
be generalized to any situation in which the subordinate
perceives a conflict between the planning and performance
evaluation tasks and an increasing complexity of the
superior’s situation. The additional treatment we ran in
which the subordinate is only partially aware of the super-
ior’s additional task provides evidence that increased sub-
ordinate cooperation persists even if the subordinate is not
informed about the exact nature and payoff consequences
of the additional task. But it also indicates that the level of
subordinate cooperation may depend on this knowledge.
This implies that, instead of concealing the use of the
negotiated budgets in practice, a superior may be better
off when she reveals her restrictions and complexities to
the subordinate because this may lead to more
cooperation.
In the light of other research, however, this recommen-
dation may depend on how characteristics of the superior’s
additional task and task outcomes beyond those investi-
gated in this study affect a subordinate’s cooperativeness.
For example, Fisher et al. (2014a) use a setting in which
the consequences of the superior’s planning task are
framed as an additional payoff that increases when plan-
ning accuracy increases. They find that a subordinate cre-
ates more slack and therefore, seems to act less
cooperatively when he becomes aware of the superior’s
additional payoff but does not participate in it. Even
though the setting in Fisher et al. (2014a) is distinct from
ours as the subordinate determines his budget unilaterally
and there is no subsequent subordinate performance, their
results suggest that our findings on subordinate coopera-
tion may not generalize to settings in which the conse-
quences of planning errors are framed as additional
benefits arising from increased planning accuracy. Yet,
the combined evidence from both papers also suggests that
in practice, firms may want to emphasize the complexity of
planning tasks and the costs from suboptimal coordination
rather than the additional profit from increased accuracy.
This seems to be particularly important when the sub-
ordinate does not participate in this additional profit.
Another limitation may be that our experiment was
conducted in a one-shot setting to increase experimental
control, but budgeting relationships in practice are likely
repeated. Repeated interaction generally increases the
cooperation of negotiating parties (Ben-Yoav & Pruitt,
1984; Fisher et al., 2006), but it is unclear whether their
behavior would be affected equally strongly under all con-
ditions. Finally, we assume that the subordinate is per-
fectly informed about the outcome from his effort. In
practice, however, subordinates may have imperfect infor-
mation about this relation. While this is beyond the scope
of our paper, exploring the implications of increased sub-
ordinate uncertainty about expected output may represent
a fruitful avenue for future research.
Appendix A. Supplementary material
Supplementary data associated with this article can be
found, in the online version, at http://dx.doi.org/10.1016/
j.aos.2015.02.002.
 M.C. Arnold, R.M. Gillenkirch / Accounting, Organizations and Society 43 (2015) 1–16 15

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