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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 PEOPLE CONTROLS


employed and their
shared values and
norms.

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 ...
PRO CON
Behavior can be influenced Often less than perfect indicators of
while allowing significant whether good actions have been taken.
autonomy. They shift risk to employees (because
They yield greater employee of uncontrollable factors). Hence, they
commitment and motivation. often require a risk premium for risk
averse employees.
They are often inexpensive.
Sometimes conflicting functions:
e.g. performance measures
Motivation to achieve
are often collected for
reasons not directly targets should be challenging
related to management Communication among entities
control. targets should be slightly conservative

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