Performance Budget

A performance budget (or performance-based budgeting) links resources to intended outcomes. Instead of allocating funds primarily by historical spending or line items, it allocates resources based on specific, measurable results the organization or program is expected to achieve. This approach is most common in government and nonprofit settings but can be applied in private organizations as well.

How it works

• Define outcomes: Identify the goals the program is meant to produce (e.g., higher test scores, reduced mortality, improved water quality).
• Select metrics: Choose measurable indicators that reflect progress toward each outcome.
• Set targets: Establish numerical or qualitative benchmarks for acceptable performance.
• Allocate inputs: Assign budgets to units or programs based on their expected contribution to the targets.
• Monitor and evaluate: Measure performance, report results, and adjust funding or activities as needed.
• Verify results: Where appropriate, use audits or independent verification to guard against data manipulation.

Example outcomes

• Improvement in average student test scores
• Reduction in disease mortality or morbidity rates
• Improved drinking water quality
• Reduction in non-violent crime or citizen complaints (e.g., potholes)

Advantages

• Increased accountability: Makes it clearer how funds translate into results for taxpayers, donors, or stakeholders.
• Greater transparency: Communicates organizational priorities through outcome-focused goals.
• Improved alignment: Encourages spending decisions that directly support mission objectives.
• Motivation and focus: Can incentivize staff to concentrate efforts on measurable results.

Disadvantages and risks

• Priority conflicts: Different stakeholders or agencies may disagree about which outcomes to prioritize.
• Inconsistent costing: Lack of unified cost standards across units can complicate comparisons and allocations.
• Gaming the system: Targets can be manipulated or become the sole focus, producing perverse incentives (e.g., teaching to the test).
• Reduced flexibility: Rigid inputs/outputs and targets can make it hard to adapt to changing circumstances.
• Measurement challenges: Some important outcomes are hard to quantify or attribute directly to a single program.

Who uses performance budgets?

Primarily government agencies (federal, state, local) and nonprofit organizations seeking to demonstrate impact. Private-sector units may use performance budgeting to align departmental spending with strategic objectives.

How to create an effective performance budget

1. Clarify objectives tied to the organization’s mission.
2. Choose a small set of meaningful, measurable metrics (relevant, attainable, time-bound).
3. Define baseline data and realistic targets.
4. Allocate funding based on expected contribution to outcomes.
5. Establish regular monitoring, reporting, and review cycles.
6. Build verification and audit processes to ensure data integrity.
7. Allow for adjustments: review targets and budgets periodically to reflect new information or changing conditions.
8. Combine quantitative metrics with qualitative assessment to avoid narrow focus on numbers alone.

Tips:
– Use enough metrics to capture core performance, but avoid overload.
– Design metrics and incentives to minimize unintended behaviors.
– Standardize costing methods across units where possible.

Practical example

A school district ties a portion of program funding to improvements in aggregate test scores. While this can focus resources on student learning, it may also prompt narrow teaching to the tested material or manipulation of scores if safeguards and broader performance measures are not in place.

Key takeaways

• Performance budgets allocate resources based on desired outcomes rather than historical spending.
• They can improve accountability and alignment but carry risks like gaming, inflexibility, and measurement difficulties.
• Effective design requires careful metric selection, verification, and periodic review.

When to use it

Performance budgeting is most useful when outcomes are measurable, attributable, and central to organizational mission. It works best alongside robust evaluation systems and safeguards that limit perverse incentives.