A performance budget combines the inputs of resources and the outputs of services to drive goal achievement for each unit within an organization. This innovative approach primarily aims to measure and score relative performance based on defined outcomes. Such budgeting is commonly implemented by government bodies and agencies to transparently demonstrate the use of taxpayer funds and the corresponding services provided by federal, state, or local governments.
Key Takeaways
- Performance budgets integrate the inputs of resources and the outputs of services for each organizational unit.
- Their intent is to fuel employee commitment to generating positive results.
- Challenges include potential disagreements over spending priorities and a lack of uniform cost standards.
Understanding a Performance Budget
The core decision-making process for performance budgets revolves around the outputs—or outcomes—of services. Essentially, fund allocation is contingent upon specific goals set by budget committees and agency heads. For example, schools might reward teachers with bonuses or promotions based on overall student test scores, intended as indicators of high teaching efficacy (though this may not always be directly correlated).
Performance budgets aim to bolster employee motivation, thus enhancing their dedication to achieving positive outcomes.
Some examples of measurable outcomes addressed by performance budgets may include:
- Advancement in average test scores across a school district
- Reduction in mortality or morbidity rates in health programs
- Improvement in the quality of drinking water in a community
- Reduction of non-violent crime within a city
- Diminishment of road pothole complaints
These metrics would be affixed with specific numerical targets, and performance budgets would identify these targets alongside methods of performance evaluation. Performance budgets typically quantify otherwise subjective or qualitative factors, enabling measurable accounting.
Advantages and Disadvantages of a Performance Budget
In the public sector, performance budgets elevate the accountability of local authorities to taxpayers by clearly outlining priorities and assigning tangible measurements to goals. Taxpayers are often eager to understand how their money is allocated and the results thereof.
Similarly, nonprofit organizations utilize performance budgets to connect inputs and outputs for their missions. Donors are usually interested in the social “return” generated by their contributions.
Some downsides to performance budgets include:
- Potentially contentious prioritization of spending across multiple government agencies
- Absent unified cost standards among diverse agencies
- Risk of data manipulation within departments to achieve targets, possibly necessitating independent verification
- Inflexibilities once inputs and outputs have been set in place
A prominent disadvantage is that target scores or numbers representing organizational benchmarks can be manipulated or might become the sole focus. For instance, teachers might prioritize specific metrics composing their scores while neglecting other essential yet non-measurable aspects of teaching.
Related Terms: budget, taxpayers, nonprofit organizations, input-output analysis, benchmark
