Tanya Williams is the new accounts manager at Southpac Bank. She has just been asked to estimate how many new bank accounts she will generate during the next year. The Australian economy has been growing and the bank has experienced a 10 per cent increase in its number of bank accounts over each of the past five years. In the year just ended the bank had 10 000 accounts.
The new accounts manager is paid a salary plus a bonus of $50 for every new account she generates above the budgeted amount. Thus, if the annual budget calls for 500 new accounts, and 540 new accounts are achieved, Williams’ bonus will be $2000 (40 x $50).
Williams believes that the economy will continue to grow at the same rate next year as it has in recent years. She has decided to submit a budgetary projection of 700 new accounts for the coming year.
Required
1. Your consulting firm has been hired by the managing director of the bank to make recommendations for improving its operations. Define and explain the negative consequences of budgetary slack.
2. Discuss how the bonus program may encourage budgetary slack.
3. How might the bank reduce the incentive to create budgetary slack?
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