Académique Documents
Professionnel Documents
Culture Documents
* -Goal congruence
* -Informal factors that influence goal congruence
* -Formal control systems
* -Types of organizations
* -Functions of the controller
* -Performance measurement
* -Difficulties in implementing performance measurement systems
* -Interactive control
* Management compensation
* Characteristics of incentive compensation plans
* Incentives for business unit manager
* Agency theory.
*Goal Congruence
* An adequate control system will at least not encourage
individuals to act against the best interest of the
organization For example, if the system emphasizes cost
reduction and a manager responds reduces costs in his
own unit but not in wrong direction.
* In evaluating any management control practices, the 2
important questions to ask are:
* What action does it motivate people to take in their own
self-interest?
* Are these actions in the best interest of the organization?
*Continued..
* Both formal systems and informal processes influence
human behavior in organization; formal control systems
includes-strategic plans, budgets, and reports, where as
informal processes such as work ethic, management style
and culture, because in order to implement organization
strategies effectively the formal mechanisms must be
consistent with the informal ones.
* Therefore, before discussing the formal system, we will
describe the informal forces, both internal and external,
that play a key role in achieving goals congruence.
*Factors
* Culture: Organization own culture-beliefs, shared
values, norms of behavior. Cultural norms are extremely
important since they explain why two organization, with
identical formal management control systems, may vary
in terms of actual control. Companies culture usually,
unchanged for many years. Organizational culture is also
influenced strongly by the personality and policies of the
CEO. If the organization is unionized, the rules and
norms accepted by the union also have a major influence
on the organizations culture.
*Internal Factors
* Management Style: Strongest impact on Mgt. control is
management style. Sub-ordinates attitude reflect what they
perceive their superiors attitude to be, and their superiors
attitudes ultimately stem from the CEO. Managers come in all
shapes, some are charismatic and outgoing, others are less
ebullient, some spend much time looking and talking to people,
some are heavily on written reports.
* Perception and Communication: In working toward the goal of
the organization, operating managers must know what these
goals are and what actions they are supposed to take to
achieve them. They receive the information through various
channels formal and informal. Despite this range of channels, it
is not always clear what senior management wants done. The
ultimate object is to achieve common goals of an organization.
*Internal Factors
* Formal Control System further classified into
* (i) MCs (ii) Rules
* Rules: Rules are formal instructions and controls including
standard instructions, job descriptions, standard operating
procedures, manuals and ethical guidelines. Example: Rule
specifies the criteria for extending credit to customers.
Every one has to follow rules until they are modified which
happens infrequently. Rules should never be broken under
any circumstances. Example: Airline pilots must never take
off without permission from the air traffic controls some
specific types of rules are listed below.
* Physical controls
* Manuals
* System Safeguards
* Task control system
*Rules
* A strategic plan implements the organizations goals and
strategies. All available information is used in making this
plan. The strategic plan is converted to an annual budget
that focuses on the planned revenues and expenses for
individual responsibility centres. In responsibility centre
actual results are compared with those in the budget to
determine whether the performance was satisfactory are
not. In case satisfactory announce reward on other hand to
take corrective actions.
Report
Strategic Responsibility Actual Vs. Performance
Budgeting
Planning Centres Plans
* Types of Organizations
CEO
Manufacturing Marketing
Manager Manager
Staff
*Functional Structure
* A business unit, also called a division, is responsible for
all the functions involved in producing and marketing a
specified product line. Business unit manager act almost
separate entity. They are responsible for planning and
coordinating the work of the separate function. HQ
reserves certain key prerogatives. It is responsible for
obtaining required funds to the various business units.
HQ also approves budgets and judge the performance of
business unit managers. Head Quarter also establishes
company wide policies. HQ also assist in key areas HR,
Public relations, controller and treasury measures.
Manager
Unit-Y Unit-Z
Unit-X
Manfg.
Plant Pla Manf
Manag Plant Mnfg.
Manager nt g.
er
*Matrix Structure
*The person who is responsible for designing and operating the management control
system as the controller. Actually, in many organizations the title of this person is
CEO.
*Functions:
1. Designing and operating information and control system.
2. Preparing financial statements and financial reports for shareholders and other
external parties.
3. Preparing and analyzing performance reports, interpreting these reports for
managers, and analyzing program and budge proposals from various segments of
the company and consolidating them into an overall annual budget.
4. Supervising internal audit and accounting control procedures to ensure the
validity of information, establishing adequate safeguards against theft and brand
and performing operational audit.
5. Developing personnel in the controller organization and participating in the
education of management personnel in matters relating to the controller
function.
Currently, companies typically have a Chief information officer (CIO) who carries out
this responsibility. In some companies, the CIO reports to the chief financial officer,
in others, the CIO reports directly to senior management.
* Performance Measurement
Financial (Profit margins, return on assets, cash flow)
Customer (Market share, customer satisfaction index)
Internal business (Employee retention, cycle time
reduction index)
Innovation and learning (% of sales from new products)
It is a tool that helps the companys focus, improves
communication, sets organizational objectives and provides
feed back on strategy.
*Continued..
* Unless the following problems are suitably dealt with, they could limit the usefulness
of the PMS.
I. Poor correlation b/w financial measures and results: There is no guarantee that
future profitability will follow target achievements in any non-financial area.
Example: Whirlpool targeted ROE of 18% b/w 1991 and 95, but it is not achieve an
ROE above 13.9% this was less than 18% but higher than previous year 12.1%.
II. Fixation of financial results: Poorly designed incentive programs create additional
pressure. Senior managers most often are compensated for financial performance.
This can disrupt congruence, causing managers to be more concerned about
financial measures than any other measure.
III. Measures are not updated: Many companies do not have a formal mechanism for
updating the measures to align with changes in strategies. This is one of the
difficulty in implementing PMS.
IV. Measurement overload: There are too many measures, the manager may risk losing
focus in trying to do too many things at once.
V. Difficulty in establishing trade-offs: Some companies combine financial and non-
financial measures into a single report and give weights to the individual measures,
it becomes difficult to establish trade off b/w financial and non-financial measures.
*Interactive Control:
* Interactive Control Chosen strategy
*Continued.
I. A subject of management control information that has a
bearing on the strategic uncertainties facing the business
becomes the focal point.
II. Senior executives take such information seriously
III. Managers at all levels of the organization focus attention on
the information produced by the system.
IV. Superior, subordinates and peers meet face-to-face to
interpret and discuss the implications of the information for
future strategic initiatives.
V. The face-to-face meetings take the form of debate and
challenge of the underlying data, assumptions and
appropriate actions.
*Characteristics:
* Every organization has goals. An important role of MCS is
to motivate organizational members to attain hose
goals. An organization goals lies in the way the
organizations incentives relate to the individuals goals.
People are influenced by both positive and negative
incentives. A positive incentive, or reward, is an
outcome that increases satisfaction of in individual
needs. Conversely, a negative incentive, or
punishment, is an outcome that decreases satisfaction
of those needs.
*Management Compensation
A managers total compensation package consists of three
components (1) salary (2) benefits (Retirement and health care,
but also perquisites of various types) and (3) incentive
compensation. Managers typically receive higher compensation in
large compensation in large compensation in large compensation
in large companies than in small firms. Most corporate bylaws and
securities regulations require incentive compensation plans and
revisions of existing plans to be approved by the shareholders.
Incentive compensation plans can be divided into short-term and
long-term plans. Short-term incentive plans are based on
performance in the current year. Long-term plans tie
compensation to longer-term accomplishments and are related to
the price of the companys common stock.
* Characteristics of incentive
compensation plan
* The total amount of bonus that can be paid to a qualified group
of employees in a given year is called the bonus pool. Payment
of bonus depends on profitability in the current year.
* Carryovers: Instead of paying the total amount in the bonus
pool, the plan may provide for an annual carryover of a part of
the amount determined by the bonus formula. Each year a
committee of the Board of Directors decides how much to add
to the carryover, or how much of the accumulated carryover to
used if the bonuses would otherwise be too low.
* Deferred Compensation: Under this system, executives receive
only 1/5 of their bonus in the year in which it was earned. The
remaining 4/5 are paid out equally over the next 4 years
* Continued.
* Benefits and short comings of short-terms financial
targets: Allow bonus to achieving annual financial
targets within short period of time.
* Bonus determination approach: A bonus award for a
business nit manager can be determined by using a
strict formula, such as a % of the business units
operating profit, or by a purely subjective assessment
by the managers superior, or by some combination of
the two.
*Continued.
* Agency theory explores how contracts and incentives
can be written to motivate individuals to achieve
goal congruence. An agency relationship exists
whenever one party (the principal) hires another
party (the agent) to perform some service and, in so
doing, delegates decision making authority to the
agent. In a corporation., shareholders are principals
and CEO is their agent. The shareholders hire the
CEO and expect that he will act in their interest. At
a lower level CEO is the principal and business unit
managers are the agents.
*Agency Theory
I. Divergent objective of principals and agents: All individuals act in their own
self-interest principals are assumed to be interested only in the financial
returns where as agents are assumed to receive satisfaction not only from
financial compensation but also others.
II. Non observability: Shareholders are not in a position to monitor the CEOs
activities daily likewise, the CEOs is not in a position to monitor the daily
activities of business unit managers.
Control Mechanism: Agency theorists can say that; they can control in two ways:
i. Monitoring: The principal can design control systems that monitors the
agents actions. Example: Audited Financial Statements.
ii. Incentives contracting: A principal may attempt establishing appropriate
incentive contracts. Based on performance of an agent toward goal
congruence awarding incentive plans. Ex: Salary +Bonus.
Business unit managers and Accounting Based Incentives: For motivating
manager of business unit through firms stock price it is very difficult. For this
reason, the CEOs incentive contracts on accounting based i.e., bonus on business
unit net income.
*Continued
*A Critique: It was invented in the 1960s and
since then has been written about extensively in
academic journals. It implies that managers in
non-profit organization and government
organization do not accept this implication. This
theory is helpful for how incentive
compensation influences the motivation of
managers.
*Criticism