Participative budgeting is a budgeting process under which those people impacted by a budget are actively involved in the budget creation process. This bottom-up approach to budgeting tends to create budgets that are more achievable than are top-down budgets that are imposed on a company by senior management, with much less participation by employees. Participatory budgeting is also better for morale, and tends to result in greater efforts by employees to achieve what they predicted in the budget. However, a purely participative budget does not take high-level strategic considerations into account, so management needs to provide employees with guidelines regarding the overall direction of the company and how their individual departments fit into that direction.
When participative budgeting is used throughout an organization, the preliminary budgets work their way up through the corporate hierarchy, being reviewed and possibly modified by mid-level managers along the way. Once assembled into a single master budget, it may become apparent that the submitted budgets will not work together, in which case they are sent back down to the originators for another iteration, usually with guidelines noting what senior management is looking for.
Because of the larger number of employees involved in participatory budgeting, it tends to take longer to create a budget than is the case with a top-down budget that may be created by a much smaller number of people. The labor cost associated with creating such a budget is also relatively high.
Another problem with participative budgeting is that, since the people originating the budget are also the ones whose performance will be compared to it, there is a tendency for participants to adopt a conservative budget with extra expense padding, so that they are reasonably assured of achieving what they predict in the budget. This tendency is more pronounced when employees are paid bonuses based on their performance against the budget.
This problem of budgetary slack can be mitigated by imposing a review of the budgets by those members of management who are most likely to know when budgets are being padded, and who are allowed to make adjustments to the budget as needed. Only by following this approach can stretch goals be integrated into a budget.