In November 1983, Mehli Mistri, Citibank\'s country manager for Indonesia, was f

Question

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 were based approximately 30% on corporate performance and 70% on individual performance, primarily performance related to forecast. 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 achieve 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 achieve 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 achieve 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 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

Explanation / Answer

1. The bottom up approach of budgeting and target setting is a partciaptive process and the managers and other employees remain more committed to achieve the target as the target is given by them . The gorund situations and the realities are closely known by the budget makers and the target even the stretched targets remain mostly achievable. The top down approach on the other hand is generally an allocation of overall group target on some arbitrary basis. In most of the cases the taget basis has no relation to the ground realities and the budget lacks any link to real situation.

The same case is happening for Citibank Indonesia. The target given by local manager is already aggressive considering the bleak economic outlook of the country. The budget target has been further increased to after tax profit goal of $0.5 M to $1 M. It is highly probable that Mr Mistri and his subordinates will not be committed from heart to achieve this target as the imposed budgeted target lacks the involvement factor of the participative budget and lacks any correaltion with ground situation.

2. It is true that when budget achievement is doubtful as the budget in unralistic , the link of bonus and incentive payment with achievement of budget targets may result in gameplans and data manipulation. In the case of Citibank Indonesia also , the 30-305% average bonus is linked to coporate and individual performance, which are again linked to buget target achievement. Considering the economic outlook of Indonesia , it is highly difficult that the after tax profit goal imposed by Head office is achievable. There is high risk that there may be some manipluation or short term foolhardy decisions to reach the target numbers. The impossible stretched target without any consideration to ground realities is reaaly a risk to Corporate ethics and fair ways of working.

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