Hd28 .m414 I Dewey Working Paper Alfred P. Sloan School of Management the Motivational Impact of Ma.na&efient-by-exception in a Budgetmy Context the Motivational Impact of Managbiekt-by-exception in a Budget/^ Y Context Recaveo 1,0 Introduction

It is often suggested in the managerial accounting literature that control system effectiveness depends not only on what information the system supplies to managers responsible for exercising control, but how managers use the information. In the context of budgetary controls, Argyris (1952) may have been the first to note that control system failure was more often affected by the style of information use rather than by the technical characteristics of the system. Subsequently, several empirical studies have focused attention on this issue (e. At the practical level, one coimnon style of information use is "management-by-exception" (MBE). Exception-reporting is probably based on the notion that only variances, both unfavorable and favorable, should attract managerial attention, particularly if they were assessed as being significant. Hence, MBE provides a basis for allocating, or rationing, managerial effort. In practice, however, such systems typically reduce to a biased preoccupation with unfavorable variances. For example, Bittel (1964, p. 5) defined MBE as system of control which enables the manager to be "spared the task of reviewing performance where things are going well (so as to) devote his attention only to those areas which really require his managerial attention." Ronen and Livingstone (1975, p. 680) suggested that, under MBE, "the response to favorable deviations not requiring corrective actions often seems to be weaker than that to unfavorable deviations." Birnberg and Nath (1967, p. 478) described exception reporting as a system in wliich "the emphasis in the feedback is on punishment rather than some mixture of punisliment and reward," while Porter and Zannotos (1978, pp. 12-13) characterized the phenomenon as one by which managers are given 07453^1 "full blame for failures and less than full credit for successes." Itami (1975) provided an analytical demonstration of how management, in the design of subordinate reward structures, might purposefully employ asymmetrical rates of penalty and reward (for unfavorable and favorable budget variances, respectively) so as to "modify" the subordinates' attitudes towards risk and thereby increase the likelihood of goal-congruent behavior on the part of the latter. He goes on to suggest that "this is perhaps common practice in many budgetary control systems. "(p. 85) Baiman and Demski (1980) obtained similar results and, like Itami, concluded that "Certainly the lovz-tail conditional variance investigation system is often observed in practice (It is probably the system which is most often used). "(p. 194, parentheses in original) Except for these last results, the general assumption …