How do you you define budgetary slack and goal congruence in profit planning?

Goal congruence is defined as “aligning the goals of two or more groups.” As used in planning and

budgeting, it refers to the aligning of goals of the individual managers with the goals of the organization as a

whole. Sometimes the performance of an individual manager’s unit will benefit from an action the manager

takes, but the overall performance of the company is either not impacted at all or it may actually be

negatively impacted. An individual division manager may reject a capital investment that would improve the

company’s total profits because the proposed project’s return on investment would cause his own division’s

return on investment to decrease. Situations like these occur because the goals of the individual managers

are not aligned with the goals of the company. 

The company’s strategic objectives are communicated to individual managers as part of the planning and 

budgeting process. However, there is a hazard in budgeting because it may lead to behaviors on the part of

managers that benefit them or their department but are not congruent with the goals of the company. This is

more likely to occur if managers’ performance will be evaluated according to whether they meet their budget

targets. Managers who develop the budgets they are going to be accountable to meet may build in

budgetary slack in order to make sure their budgets are achievable without any risk of failure. Budgetary

slack is the difference between the amount budgeted and the amount the manager actually expects. It is the

practice of underestimating planned revenues and overestimating planned costs to make the overall

budgeted profit more achievable.  

On the positive side, budgetary slack can provide managers with a cushion against unforeseen circumstances.

This can limit managers’ exposure to uncertainty and thereby reduce their risk aversion. The reduced anxiety

about risk may help the managers make decisions that are more closely congruent with the goals of senior

management.