Management Control Systems Chapter 9: Financial Performance Targets Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003

Financial results controls ... Three core elements: Financial responsibility centers The apportioning of accountability for financial results within the organization. Formal management processes Planning & budgeting to define performance expectations and standards for evaluating performance. Motivational contracts To define the links between results and various organizational incentives.

Types of financial performance targets ... Model-based (engineered) / historical / negotiated Internally / externally-derived Target costing Benchmarking Best-in-industry / best-in-class Unilateral / cooperative Fixed / Flexible Should managers be held accountable for achieving their plans regardless of the business conditions they face? Relative performance targets. Information asymmetry

Motivation / Performance Budget target difficulty … (1) Goal Difficulty Easy Impossible Motivation / Performance

Budget target difficulty … (2) “theory” (lab experiments): “Good targets” are about 25-40% achievable. Target Performance Probability

Budget target difficulty … (3) “Business practice” (field research): Targets are about 80-90% achievable. Target Performance Probability

Challenging but achievable... To minimize dysfunctional management actions Myopic behavior, data manipulation To increase manager’s commitment to budget targets To reduce the cost of organizational interventions Management-by-exception To protect against the cost of optimistic revenue projections Over-commitment of resources To create a “winning” atmosphere and positive attitude

Budget participation ... Top-down / bottom-up budgeting The budgetee is both involved and has influence over setting the budget. Leads to better acceptance of budget targets, and hence, commitment to achieve them. Is an effective way of information sharing: Corporate priorities and constraints lower-level insights about business potentials and risks. But, … slack, bias, conservatism, lack of budgeting experience.