chapter 2

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1 -1- Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, © Pearson Education Limited 2012 Slide 2.1 Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, © Pearson Education Limited 2012 Slide 2.1 Chapter 2: Results Controls -2- Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, © Pearson Education Limited 2012 Slide 2.2 Results controls 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, employees’ actions are not constrained » On the contrary, employees are empowered to take whatever actions they believe will best produce the desired results

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Chapter 2

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Page 1: Chapter 2

1

- 1 -Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, © Pearson Education Limited 2012

Slide 2.1

Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, © Pearson Education Limited 2012

Slide 2.1

Chapter 2:

Results Controls

- 2 -Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, © Pearson Education Limited 2012

Slide 2.2

Results controls

� 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, employees’ actions are not constrained

» On the contrary, employees are empowered to take whatever actions they believe will best produce the desired results

Page 2: Chapter 2

2

- 3 -Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, © Pearson Education Limited 2012

Slide 2.3

Key results control elements

� Defining the performance dimensions» What you measure is what you get; hence,

» If not congruent with the organization’s objectives, the controls will actually encourage employees to do the wrong things!

� Measuring performance on these dimensions» Objective > financial > market-based: for example, stock price» > accounting-based: for example, return on assets» > non-financial: for example, market share, customer satisfaction» Subjective: for example, managerial characteristics (“being a team player”)

� Setting performance targets» Motivational effects

� Providing rewards (or punishments)» “Incentives” – monetary and non-monetary

- 4 -Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, © Pearson Education Limited 2012

Slide 2.4

� 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

Conditions for effective results control

Page 3: Chapter 2

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- 5 -Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, © Pearson Education Limited 2012

Slide 2.5

� 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 uncontrollable, the controls tell us little

about the actions that were taken:

� Good actions will not necessarily produce good results

� Bad actions may similarly be obscured

Ability to influence results

- 6 -Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, © Pearson Education Limited 2012

Slide 2.6

� The effectiveness of results measures must be

judged by their ...

» Ability to evoke the desired behaviors

� Measurement properties

» Congruence

» Controllability

» Precision

» Objectivity

» Timeliness

» Understandability

» Cost efficiency

Ability to measure results effectively

Page 4: Chapter 2

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- 7 -Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, © Pearson Education Limited 2012

Slide 2.7

� Behavior can be influenced

while allowing significant

autonomy

� They yield greater employee

commitment and motivation

� They are often “inexpensive”

– For example, performance measures are often already collected for reasons not directly related to managementcontrol (e.g., financial reporting)

� Often less-than-perfect indicators

of whether good actions have been

taken

� They shift risk to employees (due

to 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

Pros and cons of results controls

PRO CON