1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor Emeritus of Accounting Bryant University MANAGERIAL ACCOUNTING 10 TH EDITION BY MAHER, STICKNEY & WEIL INCENTIVE ISSUES STUDENT CHAPTER 12 © Copyright 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South- Western are trademarks used herein under license.

Managerial Planning, Control, & Performance Evaluation 2 1.Describe key characteristics of divisional incentive compensation plans. 2.Compare & contrast expectancy & agency approaches to motivation. 3.Describe balanced scorecard as a way to tie performance measures to organizational goals. LEARNING OBJECTIVES Continued

Managerial Planning, Control, & Performance Evaluation 3 4.Explain what constitutes fraudulent financial reporting. 5.Identify controls that can be instituted to prevent financial fraud. LEARNING OBJECTIVES

Managerial Planning, Control, & Performance Evaluation 4 CHAPTER GOAL Chapter 12 discusses issues in design & use of management performance evaluation & incentive plans to motivate managers to act in the organization’s best interests. Good performance evaluation & incentive plans induce “win-win” results if they avoid incentives for fraudulent financial reporting. ☼☼

Managerial Planning, Control, & Performance Evaluation 5 What forms do divisional incentives take? Divisional incentives can be cash or profit sharing for short-term performance; stock or stock options as deferred compensation; & special awards. LO 1 MANAGERS WANT TO KNOW!

Managerial Planning, Control, & Performance Evaluation 6 How will performance be evaluated? Performance can be evaluated based on accounting numbers, returns to stockholders or both. LO 1 MANAGERS WANT TO KNOW!

Managerial Planning, Control, & Performance Evaluation 7 PRODUCT LIFE CYCLE : Stages 4 stages of the product life cycle are:  Design & development: low sales but high research, design & development costs  Growth  Maturity  Decline LO 1

Managerial Planning, Control, & Performance Evaluation 8 EXPECTANCY THEORY: Definition Maintains that people act in ways to obtain rewards they desire & prevent penalties they wish to avoid. LO 2

Managerial Planning, Control, & Performance Evaluation 9 AGENCY THEORY: Definition Deals with relations between supervisors & workers & assumes employees will not necessarily behave as their employers desire. LO 2

Managerial Planning, Control, & Performance Evaluation 10 BALANCED SCORECARD: Definition Is a model of lead & lag indicators of performance including both financial & nonfinancial performance measures. LO 3

Managerial Planning, Control, & Performance Evaluation 11 BALANCED SCORECARD PERSPECTIVES 4 perspectives of the balanced scorecard approach are:  Learning & growth  Internal business & production process perspective  Customer  Financial LO 3

Managerial Planning, Control, & Performance Evaluation 12 LEARNING & GROWTH: Building An Incentive Plan Key measures: a good incentive plan rewards managers who promote:  Employee satisfaction, high morale  Employee retention  Employees develop organization-specific intellectual capital  Employee productivity LO 3

Managerial Planning, Control, & Performance Evaluation 13 INTERNAL BUSINESS & PRODUCTION PROCESS: Building An Incentive Plan Key measures: a good incentive plan rewards managers who promote:  Supplier relations  Process improvement LO 3

Managerial Planning, Control, & Performance Evaluation 14 CUSTOMER: Building An Incentive Plan A company needs to define its customers & know their expectations Key measures: a good incentive plan rewards managers who promote:  Customer satisfaction  Customer retention  Market share  Customer profitability LO 3

Managerial Planning, Control, & Performance Evaluation 15 FINANCIAL: Building An Incentive Plan Financial measures are necessary but not sufficient. They are a story about the past, not the future. Key measures: a good incentive plan rewards managers who improve:  Net income  Return on investment LO 3

Managerial Planning, Control, & Performance Evaluation 16 INCENTIVE QUESTION 1 Should rewards be based on current or future performance? An advantage to basing on future performance is the “golden handcuffs” that tie managers to the company. Most companies use a combination of current & deferred rewards. LO 3

Managerial Planning, Control, & Performance Evaluation 17 INCENTIVE QUESTION 2 Should rewards be based on division or company-wide performance? When based on the manager’s responsibility center alone, it focuses the attention without considering the impact of their actions on the whole company. Most companies use both. LO 3

Managerial Planning, Control, & Performance Evaluation 18 INCENTIVE QUESTION 3 Should rewards use a fixed formula or subjective judgment in providing rewards? The advantage of a formula-based plan is that managers know what is expected & what reward they will get if they meet expectations. LO 3

Managerial Planning, Control, & Performance Evaluation 19 INCENTIVE QUESTION 4 Should rewards be based on accounting results or stock performance? Tying managers’ compensation to stock performance loads uncontrollable risk on them. Using EVA both focuses managers on creating value for shareholders & relies on nonstock performance measures. LO 3

Managerial Planning, Control, & Performance Evaluation 20 INCENTIVE QUESTION 5 Should rewards be based on absolute or relative performance evaluation? Relative performance compares divisional performance with other divisions in the same industry with less than optimum comparisons. LO 3

Managerial Planning, Control, & Performance Evaluation 21 INCENTIVE QUESTION 6 Should rewards be cash, stock or prizes? Many companies use a combination because of the different (current vs. deferred) methods of reward. Expectancy theory finds prizes more attractive and more motivating. LO 3

Managerial Planning, Control, & Performance Evaluation 22 NONPROFIT ORGANIZATIONS Financial performance has more to do with proper accountability than achieving targets.  In bureaucracies, key performance measures involve adherence to rules  Some nonprofits value rule by culture or shared values  Voluntary & charitable organizations rely on intrinsic rewards LO 3

Managerial Planning, Control, & Performance Evaluation 23 FRAUDULENT FINANCIAL REPORTING: Definition Is intentional conduct resulting in materially misleading financial statements. LO 4

Managerial Planning, Control, & Performance Evaluation 24 FRAUDULENT FINANCIAL REPORTING For financial reporting to be fraudulent:  It must result from intentional or reckless conduct  The resulting misstatements must be material to the financial statements. LO 4

Managerial Planning, Control, & Performance Evaluation 25 TYPES OF INTERNAL CONTROLS In addition to separation of duties, common internal controls include:  Limits on expenditures.  Management authorization for use of company assets  Reconciling sets of books  Prohibiting particular activities & behavior  Rotating personnel & requiring vacations. LO 5

Managerial Planning, Control, & Performance Evaluation 26 INDEPENDENT AUDITORS Independent audits  Are required by the SEC for firms selling securities across state lines  Help prevent fraud through reviews of internal controls LO 5

Managerial Planning, Control, & Performance Evaluation 27 CHAPTER 12 THE END