1. 10 -1  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Motivating Behavior in Management Accounting and Control Systems Chapter 10

2. 10 -2  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Introduction u Nathaniel Young has been developing the technical side of the new management accounting and control system (MACS). u Several managers and their employees were expressing concerns about the proposed changes to the MACS.

3. 10 -3  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Introduction u Nathaniel thought that the daily operations of the system should be consistent with the company’s ethical and cultural norms of behavior. u He wanted to encourage broader thinking for all employees through the use of multiple performance measures. u After reading this chapter you should be able to...

4. 10 -4  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Learning Objectives 1 Discuss the four key behavioral considerations in MACS design. 2 Explain The Human Resources Model of Management. 3 Apply the ethical control framework to decisions.

5. 10 -5  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Learning Objectives 4 Discuss Task and Results Control Systems. 5 Understand the Balanced Scorecard and its applications.

6. 10 -6  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Learning Objective 1 Discuss the four key behavioral considerations in MACS design.

7. 10 -7  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Management Accounting and Control Systems u A major role for control systems is to motivate behavior congruent with the desires of the organization. u There are four major behavior considerations related to management accounting and control systems. u What are these considerations?

8. 10 -8  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Management Accounting and Control Systems 1 Embedding the organization’s ethical code of conduct into MACS design 2 Using a mix of short-term and long-term qualitative and quantitative performance measures (or the balance scorecard approach) 3 Empowering employees to be involved in decision making and MACS design

9. 10 -9  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Management Accounting and Control Systems 4 Developing an appropriate incentive system to reward performance u Companies whose MACS display these four characteristics subscribe to a world view of the role of management labeled the Human Resource Management Model.

10. 10 -10  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Learning Objective 2 Explain The Human Resources Model of Management.

11. 10 -11  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Human Resource Management Model of Motivation u How were people viewed by the scientific management school? u People were viewed as finding work objectionable, – having little knowledge to contribute to the organization, and – motivated only by money.

12. 10 -12  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Human Resource Management Model of Motivation u How were people viewed by the Human Relations Movement? u People were viewed as having needs other than money. u Employees wanted respect and discretion over jobs. u They wanted to feel that they contributed something valuable to the organization.

13. 10 -13  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Human Resource Management Model of Motivation u What is the Human Resource Management Model of Motivation? u It is the most contemporary management view of motivation. u It is based on initiatives to improve the quality of working life. u It introduces a high level of employee responsibility.

14. 10 -14  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Human Resource Management Model of Motivation u How are people viewed by the Human Resources Model of Motivation? u People do not find work objectionable. u Employees want to participate in developing objectives and obtaining goals. u They have a great deal of informational knowledge to contribute to the organization.

15. 10 -15  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Human Resource Management Model of Motivation u People are creative. u They are responsible. u Individuals are motivated both by financial and non-financial means of compensation. u People desire opportunities to affect change.

16. 10 -16  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Human Resource Management Model of Motivation u The Human Resource Model is used as the basis for presenting the four behavioral considerations in MACS design. Mix of performance measures Empowering employees Incentive system Ethical code of conduct

17. 10 -17  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Ethical Code of Conduct and MACS Design u First, a well-designed MACS should incorporate the principles of an organization’s code of ethical conduct to guide and influence behavior and decision making. u Ethics is a discipline that focuses on the investigation of standards of conduct and moral judgement. Ethical code of conduct

18. 10 -18  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Ethical Code of Conduct and MACS Design u The ethical framework embedded in system design is important because it will influence the behavior of all users. u Who is the key user group? – managers u Often managers are subjected to pressures to suspend their ethical judgement. u What are examples of these pressures?

19. 10 -19  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Ethical Code of Conduct and MACS Design 1 Requests to tailor information to favor particular individuals or groups 2 Pleas to falsify reports or test results 3 Solicitations for confidential information 4 Pressures to ignore a questionable unethical practice

20. 10 -20  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Ethical Code of Conduct and MACS Design u What should system designers do? u They should attempt to ensure the following: u The organization has formulated, implemented, and communicated to all employees a comprehensive code of ethics.

21. 10 -21  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Ethical Code of Conduct and MACS Design u All employees understand the code of ethics and the boundary systems that constrain behavior. u System exists, in which employees have confidence, to detect and report violations of the organization’s code of ethics.

22. 10 -22  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Ethical Code of Conduct and MACS Design u Hierarchy of Ethical Principles Organizational or Group Norms Personal Norms Legal Rules Societal Norms Professional Memberships

23. 10 -23  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Ethical Code of Conduct and MACS Design u How can organizations reduce ethical conflicts? – by maintaining a hierarchical order of authority – by the way the chief executive and other senior managers behave and conduct business

24. 10 -24  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Ethical Code of Conduct and MACS Design u What are some common ethical conflicts? – between the law and the organization’s code of ethics – between the organization’s practiced code of ethics and common societal expectations – between the individual’s set of personal and professional ethics and the organization’s code of ethics

25. 10 -25  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Ethical Code of Conduct and MACS Design – between the organization’s stated and practiced values u Faced with a true conflict, the individual has several choices. u What are some of these choices? 1 Point out discrepancies to a superior and refuse to act unethically.

26. 10 -26  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Ethical Code of Conduct and MACS Design 2 Point out discrepancies to a superior and act unethically. 3 Take the discrepancy to a mediator in the organization, if one exists. 4 Work with respected leaders in the organization to change the discrepancy. 5 Go outside the organization to publicly resolve the issue.

27. 10 -27  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Ethical Code of Conduct and MACS Design 6 Go outside the organization anonymously to resolve the issue. 7 Resign and go public to resolve the issue. 8 Resign and remain silent. 9 Do nothing, and hope that the problem will go away.

28. 10 -28  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Learning Objective 3 Apply the ethical control framework to decisions.

29. 10 -29  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Elements of an Effective Ethical Control System u To promote ethical decision making, management should implement an ethical control system. u What is an ethical control system? u It is a system that reinforces the ethical responsibility of all of the firm’s employees.

30. 10 -30  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Elements of an Effective Ethical Control System u What are the elements of an effective ethical control system? – A statement of the organization’s values – A clear statement of the employee’s ethical responsibilities – Training to help employees identify and deal with ethical dilemmas

31. 10 -31  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Elements of an Effective Ethical Control System – Evidence that senior management expects employees to adhere to its code of ethics – Evidence that employees can make ethical decisions without fear of reprisals – Ongoing internal audit of the efficacy of the ethical control system

32. 10 -32  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Gather Facts Evaluate Alternatives Make Decision Steps in Making an Ethical Decision

33. 10 -33  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Decision Model for Resolving Ethical Issues Determine the Facts: What, Who, Where When, How Define the Ethical Issue Identify Major Principles, Rules, Values

34. 10 -34  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Decision Model for Resolving Ethical Issues Specify the Alternatives Compare Values and Alternatives Assess the Consequences Make Your Decision

35. 10 -35  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Learning Objective 4 Discuss Task and Results Control Systems.

36. 10 -36  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Motivation and Goal Congruence u When designing jobs and specific tasks, system designers should consider three dimensions of motivation. u What are these three dimensions? 1 Direction 2 Intensity 3 Persistence

37. 10 -37  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Motivation and Goal Congruence u Goal congruence is present when the actions that employees take and their personal goals are consistent with those of the organization. u In a perfect world employers could rely on employee’s self control to monitor their own behavior.

38. 10 -38  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Types of Control Systems u In the real world management often relies on different forms of behavioral control. u What are the two most commonly used types of control? 1 Task control 2 Results control

39. 10 -39  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Task Control u What is task control? u It is the process of finding ways to control human behavior so that a job is completed in a pre-specified manner. u There are two categories of task control: 1 Preventive control 2 Monitoring

40. 10 -40  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Task Control u In preventive control much, if not all, of the discretion is taken out of performing a task. u Monitoring means inspecting the work or behavior of employees while they are performing a task.

41. 10 -41  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Results Control u What is results control? u It is the process of measuring employee performance against stated objectives. u For results control to be effective, the organization must... – clearly define objectives which are then communicated, and – design consistent performance measures.

42. 10 -42  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Results Control u When is results control most effective? u Organization members understand the organization’s objectives and their contribution to those objectives. u They have the knowledge and skill to respond to changing situations. u The performance measurement system is designed to assess individual contributions.

43. 10 -43  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Learning Objective 5 Understand the Balanced Scorecard and its applications.

44. 10 -44  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Using a Mix of Performance Measures u What is the second major behavioral characteristic of a well designed MACS? – Using a mix of short-term and long-term qualitative and quantitative performance measures (or the balance scorecard approach) Mix of performance measures

45. 10 -45  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Using a Mix of Performance Measures u Occasionally, employees are so motivated to achieve a single goal that they engage in dysfunctional behavior. u What are some examples of dysfunctional behavior? – gaming – data falsification

46. 10 -46  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Using a Mix of Performance Measures u The traditional focus of performance measures has been on quantitative financial measures. u What are some quantitative non-financial measures? Cycle Time Yield Schedule Adherence Market Share Customer Retention

47. 10 -47  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Using a Mix of Performance Measures u Organizations can design performance measurement systems that encourage a desired behavior. u Multiple performance measures should reflect the complexities of the work environment and the variety of contributions that employees make.

48. 10 -48  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young The Balanced Scorecard u What is the balanced scorecard? u It is the first systematic attempt to design a performance measurement system that translates an organization’s strategy into clear objectives, measures, targets, and initiatives. u It integrates the measures used across organizations.

49. 10 -49  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young The Balanced Scorecard u The measures derived under the scorecard represent a balance between four measurement perspectives. u What are these measures? 1 External financial measures for stakeholders and customers such as Return on Capital Employed

50. 10 -50  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young The Balanced Scorecard 2 Customer measures such as retention and satisfaction 3 Internal business process perspective measures such as cycle time 4 Measures for learning and growth such as the number of new patents and the development of employee skills

51. 10 -51  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young The Balanced Scorecard Financial perspective How do we look to our stakeholders? Customer Perspective How do we look to our customers? Organization Learning Are we able to sustain innovation? Business Processes What processes are the value drivers? ?

52. 10 -52  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Empowering Employees to be Involved in MACS Design u What is the third major behavioral characteristic of a well designed MACS? u It is empowering employees to be involved in decision making and MACS design. Empowering employees

53. 10 -53  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Empowering Employees to be Involved in MACS Design u Empowering employees requires two essential elements: 1 Allowing employees to participate in decision making 2 Ensuring that they understand the information they are using and generating

54. 10 -54  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Developing Appropriate Incentive Systems u What is the fourth major behavioral characteristic of a well designed MACS? u Developing an appropriate incentive system to reward performance. Incentive system

55. 10 -55  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Developing Appropriate Incentive Systems u What are intrinsic rewards? u They are those rewards that come from within an individual. u They reflect satisfaction from doing the job. u What are extrinsic rewards? u They are rewards that one person provides to another to recognize a job well done.

56. 10 -56  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Performance Measurement and Reward System u There are six attributes of a measurement system that must be in place to motivate desired performance. 1 Employees must understand their job. 2 Designers of the performance measurement system must make a careful choice about whether it measures employees’ inputs or outputs.

57. 10 -57  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Performance Measurement and Reward System 3 The elements of performance that the performance measurement system monitors and rewards should reflect the organization’s critical success factors. 4 The reward system must set clear standards for performance that employees accept.

58. 10 -58  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Performance Measurement and Reward System 5 The measurement system must be calibrated so that it can accurately assess performance. 6 In certain situations the reward system should reward group rather than individual performance.

59. 10 -59  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Performance Measurement and Reward System u What is incentive compensation? u It is a reward system that provides monetary (extrinsic) rewards based on measured results. u It is a pay-for-performance system that bases rewards on achieving or exceeding some measured performance.

60. 10 -60  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Types of Incentive Compensation – Cash bonus – Profit sharing – Gainsharing – Stock Options

61. 10 -61  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Types of Incentive Compensation u What is a cash bonus? u It is a payment of cash based on some measured performance. u It is also called a lump-sum reward, pay for performance, and merit pay. u What is profit sharing? u It is a cash bonus that reflects the organization’s, or an organization unit’s, reported profit.

62. 10 -62  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Types of Incentive Compensation u What is Gainsharing? u It is a system for distributing cash bonuses from a pool when the total amount available is a function of performance relative to some target. u What are the three most widely used Gainsharing programs?

63. 10 -63  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Types of Incentive Compensation 1 Improshare (Improved Productivity Sharing) 2 Scalon plan: Base Ratio = Payroll costs ÷ Value of goods or service 3 Rucker Standard = Payroll costs ÷ Production value

64. 10 -64  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Types of Incentive Compensation u What is a stock option? u It is a right to purchase a stated number of the organization’s shares at a stipulated price (the option price).

65. 10 -65  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Conclusion u Nathaniel Young now understands the four key behavioral characteristics that comprise a well-designed MACS. u As a result, he is careful to involve employees in designing his new MACS.

66. 10 -66  2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young End of Chapter 10