Advanced Management

Accounting

Strategic Control System

Incentive System
 What is control?
Control, in a broader sense, is making sure that the actual
behaviours (of individual, groups, organisations as well as
other things) are in line with the ideals (standards,
objectives, norms, values & beliefs, rituals and so on).
So, two fundamental elements in conceptualising control are:

Actual
Ideals
behaviour

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 What is control?
What does this making sure include? Or, in other words,
what one should do to make sure this match between
ideals and actual behaviours.
Goal setting (knowing the ideal). This also include knowing what
the environment demands from the organisation.
Performance measurement (measuring the actual behaviour).
Comparisons and judgements (comparing actual with the ideal
and making judgements about actual behaviours and also the
ideals).
Corrective actions: decision-making, communication and
implementation (including rewarding and punishments) to
correct the deviations between ideal and actual behaviours.
Three dimensions of human behaviour
Rational economic behaviour: maximising
economic rewards
Psychological/cognitive behaviour: achieving a
psychological equilibrium mental
consistency and human motivation.
Political behaviour: discipline, power, control
and resistance.
 Economic-rational assumptions of
human behaviour
Utility maximisers
Opportunistic, work and risk aversive
Rationality, and unlimited cognitive capacity in
decision choice (in some economic theories,
especially in agency model)
Imperfect knowledge and bounded-rationality
(in some other economic theories, example
transaction cost economics).
 Economic-rational assumptions of
organisational configurations
Organisations are programmable entities.
Programming/configurational objective is to
maximise profits/shareholders wealth.
Organisational objective of profit maximisation
contradicts with individual employees utility
maximisation objectives and behavioural
conditions of opportunism and work/risk
aversion.
However, Nash equilibrium (a win-win situation)
can be achieved though properly devised control
and incentive devices.
Optimum level of performance target:
classical agency-theory model?
Expected payoff

Agents expected income

Expected payoff and agents expected income

R2
R2 = Maximum level of
return for principal.
R1 = Principals return when
there is no performance
R1 based incentives for agent

Basic wage with no performance based incentives

B opt Agents risk and effort

Optimum level which (level of budget difficulty)
Maximises principals
return
Behavioural challenge of management
control: economic rational model
Setting proper levels of difficulty in
performance targets so that profit
maximisation objective can be achieved. That
is deciding the appropriate level of risk,
rewards and performance targets to be
achieved (these are the elements of a
performance-based contract).
 Key psychological assumptions of
human behaviour
Human beings are boundedly rational. Their
rationality is bounded by lack of perfect
information, cognitive limitations of information
processing, and emotionality.
They are satisfying rather than maximising.
Individuals seek a state of internal equilibrium,
which is often called mental consistency. This
means an individuals mental states such as
attitudes, beliefs, and preferences etc. fit
together harmoniously without conflicts.
 Rewards
Extrinsic Intrinsic
Provided by the Self-provided by individuals
organization to the Examples
employee Satisfaction for a job well
Examples done
Cash bonus Satisfaction provided by the
Stock options scope of the job
Public recognition Satisfaction provided by the
opportunity for advancement

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 Effective Reward Systems
An effective reward system motivates an employee to
act in the organization's best interests
If the reward system is based on extrinsic rewards the
employee must
Understand clearly what is rewarded
Have the authority to affect what is rewarded
Value what is rewarded

Notes: incentive compensation systems work best in

organisations in which employees have the skill and authority
to react to conditions and make decision.
 Case Study
Citibank: Performance Evaluation
1. Find type of rewards discussed in case study.
2. What are the areas covered in measuring
managers performance?
3. Identify why has Citibank introduced a
Performance Scorecard?
4. If you were Lisa, what evaluation would you
give to James in his overall performance
rating?
THANK YOU
 Q2: What are the areas covered in
measuring managers performance?
The implemented performance scorecard specifies
goals and measures managers performance in 6
areas:
Financial measures
Strategy implementation
Customer satisfaction
Control measures
People
Standards
 Q3: Identify why has Citibank
introduced a Performance Scorecard?
Citibank was a niche player and was to provide
high level of services to customers
Only financial measures were the poor vehicle
to communicate the high service strategy
Broader view of business and focus on all the
dimensions for long term success
Reflection of Customer Satisfaction as a key
differentiator
Q4: If you were Lisa, what evaluation would you
give to James in his overall performance rating?
No. Areas Scores
1 Financial measures Above Par
2 Strategy implementation Par
3 Control measures Above Par
4 People Above Par
5 Standards Above Par
6 Customer Satisfaction Below Par

Practical Constraints faced by James McGaran

1. Diverse set of customers.

2. The branch that was handled by James was the largest and
toughest branch in the division.
3. Had a demanding clientele and challenging competition.
 Final Evaluation Rating for James
Overall Evaluation: Above Par
This is the first year the balanced scorecard was
implemented. It will take sometime to insure that all the
areas are measured appropriately
He has done exceptionally well across the scorecard and he
is consciously making efforts to over come the issues in
customer evaluation rating
Management should also have a look on James peer group
ratings to ensure customer satisfaction is fair indicator
which can be linked to overall performance
Lets not forget the parameters which are beyond branchs
control are also detrimental for customer satisfaction score.