In November 1983, Mehli Mistri, Citibank's country manager for Indonesia, was faced with a difficult situation. He had just received a memorandum from his immediate superior, David Gibson, the division head for Southeast Asia, informing him that during their just-completed review of the operating budgets, Citibank managers at corporate had raised the SE-Asia division's 1984 after-tax profit goal by $4 million. Mr. Gibson, in turn, had decided that Indonesia's share of this increased goal should be between $500,000 and $1,000,000. Mr. Mistri was concerned because he knew that the budget he had submitted was already very aggressive; it included some growth in revenues and only a slight drop in profits, even though the short-term outlook for the Indonesian economy, which was highly dependent on oil revenues, was pessimistic.

Budgets were taken very seriously at Citibank, not only because they were thought to include the most important measures of success, and also because incentive compensation for managers at Citibank was linked to budget-related performance. For a country manager, incentive compensation could range up to approximately 70% of base salary, although awards of 30–35% were more typical. Assignment of bonuses was based approximately 30% on corporate performance and 70% on individual performance, primarily on performance related to forecasting. The key measures for assessing both corporate and international-branch performance were growth, profits, return on assets, and return on equity. However, in the analyses of individual performance for the purposes of assigning incentive compensation, considerable care was taken to differentiate base earnings from extraordinary earnings (or losses) for which the manager should not be held accountable.

Based on the citibank indonesia case study ansewr the follwing:

Question 1:s “Involvement in the setting of budget targets enhances the focal manager’s commitment to achieving the target. Those who are actively involved in the process of setting their performance targets are more likely to understand why the targets were set at the levels they were, so they are more likely to accept targets and be committed to achieving them.” Critically evaluate the above statement in the context of the merits and demerits of both ‘bottom-up’ and ‘top-down’ budgeting. Based on your evaluations, do you think Mr. Mehli Mistri and his subordinates will be committed to achieving the budget target? Explain. (Relevant textbook section 3.5)

Question 2: “Highly achievable budget targets reduce the risk of gameplaying. The stakes associated with budget achievement in most firms, which include bonuses, promotions, and job security, are so significant that managers who are in danger of failing to achieve their budget targets have powerful motivations to play games, either with the numbers or through foolhardy decisions.” Critically evaluate the above statement in the context of the appropriate amount of a challenge in a financial performance target. Based on your evaluations, do you think Mr. Mehli Mistri and his subordinates will be involved in gameplaying activities? Explain

Answer rating: 100% (QA)

1 The bottom up approach of budgeting and target setting is a partciaptive process and the managers ... View the full answer