Management Control Systems Chapter 2: Results Controls Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003

Recall that ... Management Control is about taking steps to help ensure that the employees do what is best for the organization. Three issues: Do they understand what we expect of them ... Lack of direction Will they work consistently hard and try to do what is expected of them ... Lack of motivation Are they capable of doing what is expected of them ... Personal limitations

Control alternatives … Controls can focus on: the actions taken the results produced the types of people employed and their shared values and norms. ACTION CONTROLS RESULTS CONTROLS PEOPLE CONTROLS Or any combination of those ...

Results controls ... It involves rewarding individuals for generating good results, or punishing them for poor results. Results accountability It influences actions because it causes employees to be concerned about the consequences of the actions they take. However, the employees’ actions are not constrained; On the contrary, employees are empowered to take whatever actions they believe will best produce the desired results.

Elements ... Defining the performance dimensions What you measure is what you get; hence, If not congruent with the organization’s objectives, the controls will actually encourage employees to do the wrong things! Measuring performance on these dimensions Objective > financial > market-based: e.g., stock price; > accounting-based: e.g., return on assets; > non-financial: e.g., market share, cycle-time, waste; Subjective: e.g., managerial characteristics (“being a team player”). Setting performance targets Motivational effects + allow to interpret (own) performance. Providing rewards or punishments Salary increases, bonuses, promotions, job security, recognition, etc.

Conditions ... Results controls work best only when all of the following three conditions are present: Superiors / managers must know what results are desired in the areas being controlled; The individuals whose behaviors are being controlled must have significant influence on the results in the desired performance dimensions; Superiors / managers must be able to measure the results effectively.

Ability to influence results ... The person whose behaviors are controlled must be able to affect the results in a material way in a given time span. Controllability principle Results controls are useful only to the extent that they provide information about the desirability of the actions that were taken. If the results are totally uncontrollable, the controls tell us nothing about the actions that were taken: Good actions will not necessarily produce good results; Bad actions may similarly be obscured.

Ability to measure results effectively ... The “effectiveness” of results measures must be judged by their ... Ability to evoke the desired behaviors Results measures should be: Precise; Objective; Timely; Understandable.

Pros and cons of results controls ... Behavior can be influenced while allowing significant autonomy. They yield greater employee commitment and motivation. They are often inexpensive. e.g. performance measures are often collected for reasons not directly related to management control. Often less than perfect indicators of whether good actions have been taken. They shift risk to employees (because of uncontrollable factors). Hence, they often require a risk premium for risk averse employees. Sometimes conflicting functions: Motivation to achieve targets should be “challenging” Communication among entities targets should be slightly conservative