Ratchet effect
The ratchet effect is the tendency for this year's actual performance to become next year's budget target, which pushes managers to just beat rather than significantly exceed their budget.
See it move
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A sales manager is budgeted €500,000 and delivers €560,000, beating budget by €60,000. Under a strict ratchet policy, next year's target simply becomes €560,000, the full actual result, rather than a growth-adjusted €525,000. Managers who anticipate this learn to beat budget by only a small margin.
Where it fits
TopicResponsibility Accounting & DecentralisationAdvancedSubjectManagerial AccountingAdvancedTopicBudgeting & the Master BudgetAdvanced