Performance Budget: Advantages and Disadvantages

What Is a Performance Budget?

A performance budget is one that reflects both the input of resources and the output of services for each unit of an organization. The goal is to identify and score relative performance based on goal attainment for specified outcomes. This type of budget is commonly used by government bodies and agencies to show the link between taxpayer funds and the outcome of services provided by federal, state, or local governments.

Key Takeaways

  • Performance budgets reflect the input of resources and the output of services for each department or unit of an organization.
  • They are designed to motivate employees' commitment to produce positive results.
  • Disadvantages include the potential for disagreement over spending priorities and a lack of unified cost standards.

Understanding a Performance Budget

The decision process for performance budgets focuses on outputs—or outcomes—of services. In other words, the allocation of funds and resources is based on specific goals agreed upon by budget committees and agency heads of services. For instance, in schools, teachers may earn bonuses or promotions based on aggregate test scores among their students, which is supposed to show a high degree of skill and effectiveness (although this may not always be the case.)

Performance budgets, as the theory goes, are designed to motivate employees, enhancing their commitment to producing positive results.

A few examples of outcomes that a performance budget could address include:

  • Improvement in average test scores of a school district
  • Decreases in mortality or morbidity rates of a health program
  • Improvement of water quality of a county's drinking supply
  • Non-violent crime reduction in a city
  • Reduction in road pothole complaints

All of these would have numerical targets attached to them. A performance budget would be developed accordingly to identify those target numbers and a method of evaluating performance. Performance budgets often rely on quantifying otherwise qualitative or subjective factors so that they can be measured and accounted for.

Advantages and Disadvantages of a Performance Budget

The advantages in the public sector are an increase in accountability of the local authorities to the taxpayers, communication to the public about priorities, and quantifying particular goals. Taxpayers want to know where and how their money is being spent and to what end.

Similarly, nonprofit organizations draw up performance budgets to link inputs and outputs for their missions. Donors to these organizations also want to know what kind of "return" society is getting from their donations.

Some disadvantages of a performance budget include:

  • The potential for disagreement on where spending priorities should lie, in the case of a government with multiple agencies
  • Lack of unified cost standards across multiple agencies
  • The potential for a department to manipulate data in order to reach a target, which could lead to a need to spend funds on an independent party to verify results
  • A lack of flexibility once the inputs/outputs have been set

One prominent disadvantage of performance budgets is that by assigning target scores or numbers that an organization uses as its benchmark for achievement, the numbers can be gamed or become the sole focus of one's task. For instance, teachers looking to earn a certain score may only focus on the factors that comprise that score and overlook or ignore other factors that may be important to teaching but not for the performance budget.