1.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University Motivating Behavior in Management Accounting and Control Systems Chapter 8

2.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-2 Management Accounting and Control Systems Chapter 7 discussed the technical characteristics of a well-designed management accounting and control system (MACS) However, a major role for control systems is to motivate behavior congruent with the desires of the organization since human interests and motivation can vary significantly

3.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-3 Major Behavioral Considerations Embedding the organization’s ethical code of conduct into MACS design Using a mix of short and long-term qualitative and quantitative performance measures  The balanced scorecard approach Empowering employees to be involved in decision making and MACS design Developing an appropriate incentive system to reward performance

4.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-4 Impact of MACS on Behavior Many managers try to implement new systems without considering the behavioral implications and consequences of a MACS If they do not pay careful attention to behavioral factors, then:  Goal congruence may not occur  Motivation could be low  Worst of all, employees may be encouraged to engage in dysfunctional behavior

5.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-5 Human Resource Model Of Motivation (HRMM) Perhaps the most contemporary management view of motivation Based on initiatives to improve the quality of working life and the strong influence of Japanese management practices Introduces a high level of employee responsibility for and participation in decisions in the work environment Serves as the basis for the presentation of the four behavioral considerations in MACS design

6.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-6 Central Assumptions of the HRMM (1 of 2) Organizations operate under a system of beliefs about the values, purpose, and direction of their organization People find work enjoyable and desire to participate in:  Developing objectives  Making decisions  Attaining goals in their work environment Individuals are motivated by both financial and nonfinancial means of compensation

7.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-7 Central Assumptions of the HRMM (2 of 2) Employees have a great deal of knowledge and information about their jobs, the application of which will improve the way they perform tasks and benefit the organization as a whole Individuals are highly creative, ethical, and responsible They desire opportunities to effect change in their organizations

8.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-8 Ethical Code of Conduct and MACS Design A set of ethical principles is at the center of many boundary systems  A set of standards relating to acceptable behavior Thus, a well-designed MACS should incorporate the principles of an organization’s code of ethical conduct  To guide and influence behavior and decision making A MACS design that incorporates ethical principles can provide decision makers with guidance as they face ethical dilemmas

9.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-9 Pressures Affecting a MACS The key MACS users (managers) are often subject to intense pressures from their job circumstances and from other influential organizational members to suspend their ethical judgment in certain situations These pressures include the following:  Requests to tailor information to favor particular individuals or groups  Pleas to falsify reports or test results  Solicitations for confidential information  Pressures to ignore questionable or unethical practices

10.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-10 Ethics and Management Accountants Management accountants are guided by the organization’s code of ethical conduct and the ethical standards of their professional associations  For a CMA (Certified Management Accountant), the Institute of Management Accountants (IMA), which issues the certificate, provides a set of professional and ethical standards that require the CMA to be competent and to always maintain confidentiality, integrity, and objectivity Management accountants often play a significant role in MACS design, which should reflect their professional standards

11.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-11 Incorporating Ethics into a MACS Design (1 of 2) To incorporate ethical principles into the design of a MACS and help managers deal effectively with the ethical pressures, system designers might attempt to ensure the following:  That the organization has formulated, implemented, and communicated to all employees a comprehensive code of ethics (often accomplished through the organization’s beliefs system)

12.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-12 Incorporating Ethics into a MACS Design (2 of 2)  That all employees understand the organization’s code of ethics and the boundary systems that constrain behavior Boundary systems are designed to specify what actions are appropriate and those that must never be taken  That a system exists to detect and report violations of the organization’s code of ethics Employees must have confidence in the system for it to be effective

13.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-13 Avoiding Ethical Dilemmas Most organizations attempt to address ethical considerations and avoid ethical dilemmas by developing a code of ethics No universal hierarchy of ethical principles exists, but five categories capture the broad array of ethical considerations:  Legal rules  Societal norms  Professional memberships  Organizational/group norms  Personal norms This hierarchy is listed in descending order of authority

14.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-14 Ethical Hierarchy An action that is prohibited by law should be unacceptable by society, by one’s profession, by the organization, and then by each individual However, an action that is legally and socially acceptable may be professionally unacceptable and, in turn, unacceptable to the organization and its employees Any hierarchy of this sort has a number of gray areas; nevertheless, it provides general guidelines for understanding and dealing with ethical problems that arise

15.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-15 Dealing With Ethical Conflicts A decision maker may face an ethical conflict when the individual’s code of ethics sets a higher standard than the organization’s Organizations that formulate and support specific and unambiguous ethical codes create an environment that reduces ethical conflicts One step is to maintain a hierarchy of authority  The organization’s stated code of ethics should not allow any behavior that is either legally or socially unacceptable  Because most professional codes of ethics reflect broad moral imperatives such as loyalty, discretion, and competence, an organization would create public relations problems for itself if its stated code of ethics conflicted with a professional code

16.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-16 Role of Senior Management A critical variable that can reduce ethical conflicts is the way that the chief executive and other senior managers behave and conduct business If these individuals demonstrate exemplary behavior, other organizational members will have role models to emulate Organizations whose leaders evince unethical behavior cannot expect their employees to behave according to high ethical standards

17.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-17 Conflicts within a Code of Ethics In some cases, when organizations develop a formal code of ethics, they can create the potential for explicit ethical conflicts to arise with the code itself The conflicts that appear most in practice are those between the organization’s code of ethics and:  The law  Common societal expectations  The individual’s set of personal and professional ethics Other conflicts relate to personal values and norms of behavior that were acceptable prior to the adoption of the organization’s new code of ethics but that are now in question

18.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-18 Conflict Between Individual and Organizational Values (1 of 3) If the organization’s code of ethics is more stringent than an individual’s code, conflicts may arise, but if adherence to the organization’s ethical code is required and enforced:  It is possible to diminish ethical conflicts if the individual is asked and expected to pursue a more stringent code of ethics  Individuals may raise their own ethical standards without conflict

19.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-19 Conflict Between Individual and Organizational Values (2 of 3) Difficult issues may arise when the individual’s personal code of ethics prohibits certain types of behavior that are legal, socially acceptable, professionally acceptable, and acceptable to the organization Potential for conflict in such situations is heightened when the action that is unacceptable to the individual is desirable to the organization The organization may require that the person do things that he or she finds unacceptable

20.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-20 Conflict Between Individual and Organizational Values (3 of 3) In this case, the individual is confronted with a personal choice Unfortunately, the employee may have little institutional support in this situation but may be able to lobby within or outside the organization This tactic may be effective, or the affected employee may choose not to work for that organization depending on what he or she values most

21.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-21 Conflict with Stated Values (1 of 4) Employees may observe management, even senior management, engaged in unethical behavior This type of conflict is the most difficult because the organization is misrepresenting its ethical system  Forces the employee to make a choice between going public with the information or keeping it quiet In this setting, the employee is in a position of drawing attention to the problem by being a whistle-blower  Many have found this to be a lonely and unenviable position  Whistle-blowers have chosen personal integrity over their loyalty to the organization

22.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-22 Conflict with Stated Values (2 of 4) Experts who have studied this problem advise that the individual should determine:  That the facts are correct  That a conflict exists between the organization’s stated ethical policy and the actions of its employees in practice  Whether this conflict is institutional or reflects the decisions and actions of only a small minority of employees Faced with a true conflict most experts recommend that the employee work with respected leaders in the organization to change the discrepancy between practiced and stated ethics Other potential courses of action include:

23.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-23 Conflict with Stated Values (3 of 4) Point out the discrepancy to a superior and refuse to act unethically  This may lead to dismissal, the need to resign from the organization, or the experience of suffering hidden organization sanctions Point out the discrepancy to a superior and act unethically  The rationale for this choice is that the employee believes, incorrectly, this affords protection from legal sanctions Take the discrepancy to a mediator in the organization, if one exists Go outside the organization to publicly resolve the issue

24.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-24 Conflict with Stated Values (4 of 4) Go outside the organization anonymously to resolve the issue Resign and go public to resolve the issue Resign and remain silent Do nothing, hoping that the problem vanishes If the organization is serious about its stated code of ethics, it should have an effective ethics control system to ensure and provide evidence that the organization’s stated and practiced ethics are the same, including a means for employees to point out inconsistencies and to protect those employees

25.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-25 Effective Ethical Control (1 of 3) To promote ethical decision making, management should implement an ethical control system that should include the following:  A statement of the organization’s values and code of ethics written in practical terms, with examples that the employees can relate to their individual jobs  A clear statement of the employee’s ethical responsibilities for every job description and a specific review of the employee’s ethical performance as part of every performance review  Adequate training to help employees identify ethical dilemmas in practice and learn how to deal with those they can reasonably expect to face

26.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-26 Effective Ethical Control (2 of 3)  Evidence that senior management expects members to adhere to its code of ethics, meaning that management must: Provide a statement of the consequences of violating the organization’s code of ethics Establish a means of dealing with violations of the organization’s code of ethics promptly, ruthlessly, and consistently according to the statement of consequences Provide visible support of ethical decision making at every opportunity Provide a private line of communication (without retribution) from employees directly to the chief executive officer, chief operating officer, head of human resource management, or someone else on the board of directors

27.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-27 Effective Ethical Control (3 of 3)  Evidence that employees can make ethical decisions or report violations of the organizations stated ethics (be the whistle-blower) without fear of reprisals from superiors, subordinates, or peers This usually takes the form of an organization mediator who has the authority to investigate complaints, wherever they lead, and to preserve the confidentiality of people who report violations  An ongoing internal audit of the efficacy of the organization’s ethical control system Formal training is part of the process of promoting ethical decision making

28.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-28 Motivation In addition to fostering ethical behavior, a central issue in MACS design is how to motivate appropriate behavior at work When designing jobs and specific tasks, system designers should consider the following three dimensions of motivation:  Direction: the tasks on which an employee focuses attention  Intensity: the level of effort the employee expends  Persistence: the duration of time that an employee will stay with a task or job

29.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-29 Goal Congruence Careful attention to motivation is a key step for the organization and its employees to align their respective goals  This is known as achieving goal congruence The alignment of goals occurs as employees:  Perform their jobs well and are helping to achieve organizational objectives, and  Are attaining their individual goals at the same time E.g., obtaining promotions, earning financial bonuses, or advancing their careers in other ways

30.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-30 Diagnostic Control Systems Even if goals are aligned, different types of tasks require different levels of skill, precision, responsibility, initiative, and uncertainty In most situations, managers try to establish systems that they do not have to personally monitor on a regular basis  The hope is that if these systems are well designed then the manager has much more time to attend to other concerns These are called diagnostic control systems  Feedback systems that monitor organizational outcomes and correct any deviations from predetermined performance standards

31.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-31 Interactive Control Systems If there is a large degree of strategic uncertainty, managers spend much more time monitoring the decisions and actions of their subordinates  Strategic uncertainty offers threats and opportunities that could alter the operating assumptions These are called interactive control systems  Unlike diagnostic systems, interactive systems force a dialogue among all organizational participants about the data that is coming out of the system and what to do about it At the core of both systems are two common methods of control: task and results control

32.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-32 Task Control (1 of 2) Task control is the process of finding ways to control behavior so that a job is completed in a pre-specified manner Task control can be broken down into two categories:  Preventive control Much if not all of the discretion is taken out of performing a task  Monitoring Inspecting the work or behavior of employees while they are performing a task

33.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-33 Task Control (2 of 2) Task control is most appropriate when:  There are legal requirements to follow specific rules or procedures to protect public safety For example, in the manufacture of prescription drugs, and in the operation of nuclear power generation facilities  Employees handle liquid or other precious assets To reduce the opportunity for temptation and fraud  The organization can control its environment and eliminate uncertainty and the need for judgment The organization can then develop specific rules and procedures that employees must follow

34.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-34 Results Control (1 of 2) Results control methods focus on measuring employee performance against stated objectives For results control to be effective, the organization must have clearly defined its objectives, communicated them to appropriate organization members, and designed performance measures consistent with the objectives  E.g., sales people are often evaluated on the volume of sales they made during a specific time

35.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-35 Results Control (2 of 2) Results control is most effective when:  Organization members understand the organization’s objectives and their contribution to those objectives  Organization members have the knowledge and skill to respond to changing situations by taking corrective actions and making sound decisions  The performance measurement system is designed to assess individual contributions so that an individual can be motivated to take action and make decisions that reflect their own and the organization’s best interests

36.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-36 Need For Multiple Performance Measures The ways in which organizations measure performance send signals to all employees and stakeholders about what the organization considers as its priorities If organizations choose performance measures without careful consideration, then non- congruent behavior can occur Using multiple measures of performance helps employees focus on several dimensions of their jobs rather than just keying in on one dimension

37.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-37 Behavior Not Goal-Congruent Occasionally employees are so motivated to achieve a single goal that they engage in dysfunctional behavior:  Gaming the performance indicator Altering actions specifically in an attempt to manipulate a performance indicator through job- related acts  Data falsification Knowingly altering records  Smoothing (a form of earnings management) Accelerating or delaying the flow of data without altering the organization’s activities

38.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-38 Encouraging The Desired Behavior Boundary systems give employees a clear understanding of what is considered appropriate and inappropriate behavior Organizations may also design performance measurement systems that encourage the desired behavior One possibility is to use multiple performance measures to reflect the complexities of the work environment  Cause employees to recognize the various dimensions of their work and to be less intent on trying to maximize their performance on a single target at the expense of other aspects of their jobs

39.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-39 Using A Mix Of Performance Measures In addition to using multiple performance measures, MACS designers need to expand their views of the kinds of performance measures to use Only recently have managers become aware of the need for measures of quality, speed to market, cycle time, flexibility, complexity, innovation, and productivity Performance measures should also reflect new realities, such as the movement from “tall” organizations to “flat” organizations

40.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-40 MACS Design: Empowering Employees Empowering employees in MACS design requires two essential elements:  Allowing employees to participate in decision making  Ensuring that employees understand the information they are using and generating

41.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-41 Participation In Decision Making Research has suggested that employees who participate in decision making feel greater morale and job satisfaction  These heightened feelings often translate into increased productivity as employees begin to feel they have some control over what they do at work In most industries, people still perform the majority of work and have superior information:  How work is best accomplished  How to improve products and processes MACS designers should, therefore, strongly consider enlisting the participation of employees

42.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-42 Understanding Information The second critical element of empowering employees is to ensure that they understand the information they use and on which they are evaluated Some executives believe that only managers need to understand the information generated by the MACS It has become evident to many managers that employees at all levels must understand the organization’s performance measures and the way they are computed in order to be able to take actions that lead to superior performance For MACS to function well, employees have to be constantly re-educated as the system and its performance measures change

43.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-43 Incentive Systems The final behavioral consideration in MACS design is to consider the most appropriate reward systems to further motivate employees  Intrinsic rewards  Extrinsic rewards  Organizations use many systems of financial rewards A number of different theories of motivation exist:  Expectancy theory  Agency theory  Goal setting theory

44.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-44 Intrinsic Rewards Come from within an individual and reflect:  Satisfaction from doing the job  Growth opportunities the job provides Intrinsic rewards may reflect the nature of the organization and type of work one is performing Even when people are financially compensated, one of management’s most challenging tasks is to design jobs and develop a culture that lead employees to derive intrinsic rewards Their nature is such that they are not affected by management accounting information

45.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-45 Extrinsic Rewards Any reward that one person provides another to recognize a job well done  Based on assessed performance  Common examples include meals, tips, bonuses, and recognition in newsletters and on plaques  Reinforce the notion that employees have distinguished themselves within the organization Some believe that extrinsic rewards reinforce the perception that wages compensate the employee for a minimally acceptable effort and that the organization must use additional rewards to motivate the employee to provide additional effort

46.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-46 Intrinsic v. Extrinsic Rewards (1 of 3) Many compensation experts believe that organizations have not made enough use of intrinsic rewards  They claim that, given proper leadership, intrinsic rewards may have even stronger motivational effects than extrinsic rewards The effectiveness of intrinsic and extrinsic rewards is a topic of debate in the management literature Some argue that people who expect to receive a reward for completing a task successfully do not perform as well as those who expect no reward  This argument is built around the idea that the preoccupation with extrinsic rewards undermines the effectiveness of reward systems and that the design of organizations and jobs should allow employees to experience intrinsic rewards

47.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-47 Intrinsic v. Extrinsic Rewards (2 of 3) The issue remains unresolved, but one thing is clear: Most organizations ignore the role of intrinsic rewards in motivation and blindly accept the view that only financial extrinsic rewards motivate employees  Many people believe that financial extrinsic rewards are both necessary and sufficient to motivate superior performance Both systematic and anecdotal evidence suggest:  Financial extrinsic rewards are not necessary to create effective organizations  Performance rewards do not necessarily create them Both nonfinancial extrinsic and intrinsic rewards have a role to play in most organizations

48.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-48 Intrinsic v. Extrinsic Rewards (3 of 3) Some people argue that any incentive compensation program is unacceptable  They suggest that organizations must strive to be excellent to survive in a competitive world  Superior and committed performance is necessary for all employees and is part of the contract of employment and does not merit additional pay Still, many organizations rely on extrinsic monetary rewards to motivate performance  Monetary rewards are a tangible indicator of how well one is doing relative to others

49.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-49 Incentive Compensation Incentive compensation reward systems provide monetary (extrinsic) rewards based on measured results  Pay-for-performance systems  Base rewards on achieving or exceeding some measured performance Require performance measurement systems that gather relevant and reliable performance information Based on absolute performance, performance relative to some plan, or performance relative to that of some comparable group

50.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-50 Absolute Performance Measures of absolute performance include:  The number of acceptable quality units produced A piece-rate system  The organization’s results Profit levels or an organization’s balanced scorecard measures of customer or employee satisfaction, quality, and rate of successful new product introductions  The organization’s share price performance A stock option plan

51.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-51 Relative Performance Examples of rewards based on relative performance are those tied to the following:  The ability to exceed a performance target level Paying a manager for accomplishing his or her goals under budget, or paying a production group a bonus for beating a benchmark performance level  The amount of a bonus pool Sharing in a pool defined as the organization’s reported profits less a stipulated return to shareholders  The degree to which performance exceeds the average performance level of a comparable group

52.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-52 Effective Performance Measurement (1 of 2) Six attributes must be in place for a measurement system to motivate desired performance 1.Employees must understand their jobs and the reward system and believe that it measures what they control and contribute to the organization 2.Designers of the performance measurement system must make a careful choice about whether it measures employees’ inputs or outputs  The choices and decisions for these two comprise one of the most difficult tasks in the design of performance measurement and compensation systems

53.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-53 Effective Performance Measurement (2 of 2) 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 5.The measurement system must be calibrated so that it can accurately assess performance 6.When it is critical that employees coordinate decision making and other activities with other employees, the reward system should reward group, rather than individual, performance

54.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-54 Conditions Favoring Incentive Compensation Not all organizations are suited to incentive compensation systems Incentive compensation systems work best in organizations in which employees have the skill and authority to react to conditions and make decisions When the organization has empowered its employees to make decisions, it can use incentive compensation systems to motivate appropriate decision-making behavior

55.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-55 Incentive Compensation And Employee Responsibility The incentive compensation system must focus primarily on outcomes that the employee controls or influences Employees’ incentive compensation should reflect the nature of their responsibilities in the organization A mix of rewarding both short and long-term outcomes is consistent with the goals of the balanced scorecard approach

56.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-56 Rewarding Outcomes Another consideration in the design of effective incentive compensation systems is the manner in which performance is measured Incentive compensation schemes tie rewards to the outputs of employee performance rather than to inputs such as their level of effort Incentive compensation based on outcomes requires that organization members understand and contribute to the organization’s objectives

57.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-57 Input-Based Compensation Rewards may be based on inputs when:  It is impossible to measure outcomes consistently  Outcomes are affected by factors beyond the employee’s control  Outcomes are expensive to measure Input-based compensation measures the employee’s time, knowledge, and skill level  The expectation is that the unmeasured outcome is correlated with these inputs Many organizations use some form of knowledge-based remuneration

58.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-58 Managing Incentive Plans (1 of 2) Considerable evidence indicates that organizations have mismanaged incentive compensation plans, particularly those for senior executives  Many articles have appeared in influential business periodicals arguing that executives, particularly of U.S. Corporations, have been paid excessively for mediocre performance Experts debate whether compensation systems motivate goal-seeking behavior and whether they are efficient  That is, whether they pay what is needed and no more

59.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-59 Managing Incentive Plans (2 of 2) Some studies show a positive correlation between executive compensation and shareholder wealth Other studies report finding no, or even a negative, correlation between organization performance and executive compensation Many professionals argue that the amounts are excessive and reflect high status rather than performance The issue of fairness has also surfaced  Surveys indicate that, on average, CEOs in the United States earn 300 times the amount of the lowest paid employee  In Japan, the relationship is only 30 times the lowest paid worker

60.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-60 Types Of Incentive Plans The most common incentive compensation plans are cash bonuses, profit sharing, gainsharing, stock options, performance shares stock, stock appreciation rights, participation units, and employee stock ownership plans (ESOPs) We can group compensation plans into two broad categories:  Those that rely on internal measures, invariably provided by the organization’s management accounting system  Those that rely on performance of the organization’s share price in the stock market  Management accountants get involved in the first group Most employees who participate in financial incentive plans take the plans very seriously

61.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-61 Cash Bonus A cash bonus plan pays cash based on some measured performance  Such a bonus is a one-time award that does not become part of the employee’s base pay in subsequent years Cash bonuses can be:  Fixed in amount (triggered when measured performance exceeds the target) or proportional to the level of performance relative to the target  Based on individual or group performance  Paid to individuals or groups

62.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-62 Profit Sharing A cash bonus calculated as a percentage of an organization unit’s reported profit A group incentive compensation plan focused on short-term performance All profit-sharing plans define:  What portion of the organization’s reported profits is available for sharing  The sharing formula  The employees who are eligible to participate in the plan  The formula for each employee’s share

63.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-63 Gainsharing Gainsharing is a system for distributing cash bonuses from a pool when the total amount available is a function of performance relative to some target  E.g., employees in a designated unit receive bonuses when their performance exceeds a performance target Gainsharing is a group incentive that usually:  Provides for the sharing of financial gains in organizational performance  Applies to a group of employees within an organization unit, such as a department or a store Gainsharing promotes teamwork and participation in decision making

64.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-64 Stock Option Plans A stock option is the right to purchase a unit of the organizations stock at a specified price, called the option price  Judging by the published remarks of compensation experts, stock options are the most widely known, misused, and maligned approach to incentive compensation A common approach to option pricing is to set the option price at about 105% of the stock’s market price at the time the organization issues the stock option

65.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-65 Other Stock-Related Plans Organizations use many other forms of stock- related incentive compensation plans:  Performance shares stock, stock appreciation rights, participation units, and employee stock ownership plans (ESOPs) These plans provide incentive compensation to the participants when the stock price increases They are designed to motivate employees to act in the long-term interests of the organization by acting so as to increase its market (stock) value  All these plans assume that stock markets will recognize exceptional behavior with increased stock prices

66.  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 8-66 If you have any comments or suggestions concerning this PowerPoint presentation, please contact: Terry M. Lease (terry.lease@sonoma.edu) Sonoma State University