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
Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Control alternatives

Controls can focus on:

the actions taken

ACTION CONTROLS

the results produced

RESULTS CONTROLS

the types of people

employed and their
shared values and
norms.

PEOPLE CONTROLS

Or any combination of those ...

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

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.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Elements ...

Defining the performance dimensions

What you measure is what you get; hence,
If not congruent with the organizations 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.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

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.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

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.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

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.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Pros and cons of results controls ...

CON

PRO

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

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003