The company wishes to
increase the shareholder
wealth in long term so they
look forward for increasing
the NPV .But divisions are
assessed based on making
profits in the shorterm
Thus Divisions are set short
term targets where share
holder wealth maximization is
done through meeting long
term targets .ie making a
positive NPV from long term
investments
Give company managers
some share options so that
they will also try to improve
the share holder wealth
some companies perform capital
budgeting before accepting the
project and also impose the
accounting targets as well
Dilution of the
divisional performance
managers rejects some projects
which may dilute the Divisonal
performance ,even though the
project is favourable in overall basis
Use performance measures such as relevant
costing and residual income to accept the
projects which may be favourable for the
company target as a whole
Division v/s Division
Divisions may compete for
limited financial resources
during the time of the budgeting
Prioritisation (e.g.
using zero based
budgeting
Negotiations
&
compromise
Short-Termism
Managers cut R&D to hit
short term targets but erode
long term competences.
Use more nonfinancial indicators
that focus on key long term
issues such as quality,
productivity, etc.
Thus allow incentives
and bonuses based on
non financial indicators
Managers reject
projects that are “slow
starters” even though
they have positive
NPV.
Link bonuses to
longer time periods.
Individualism
The risk of budgetary slack. This
is when managers participate in
target setting and, as a result,
make the budget too easy to
achieve.