Motivating Behavior in Management Accounting and Control Systems

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Motivating Behavior in Management Accounting
and Control Systems

• Chapter 10

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Introduction

• Nathaniel Young has been developing the technical
  side of the new management accounting and control
  system (MACS).
• Several managers and their employees were
  expressing concerns about the proposed changes to
  the MACS.

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Introduction

• Nathaniel thought that the daily operations of
  the system should be consistent with the
  companys ethical and cultural norms of behavior.
• He wanted to encourage broader thinking for all
  employees through the use of multiple performance
  measures.
• After reading this chapter you should be able
  to...

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Learning Objectives

• Discuss the four key behavioral considerations in
  MACS design.
• Explain The Human Resources Model of Management.
• Apply the ethical control framework to decisions.

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Learning Objectives

• Discuss Task and Results Control Systems.
• Understand the Balanced Scorecard and its
  applications.

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Learning Objective 1

• Discuss the four key behavioral considerations
  in MACS design.

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Management Accounting and Control Systems

• A major role for control systems is to motivate
  behavior congruent with the desires of the
  organization.
• There are four major behavior considerations
  related to management accounting and control
  systems.
• What are these considerations?

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Management Accounting and Control Systems

• Embedding the organizations ethical code of
  conduct into MACS design
• Using a mix of short-term and long-term
  qualitative and quantitative performance measures
  (or the balance scorecard approach)
• Empowering employees to be involved in decision
  making and MACS design

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Management Accounting and Control Systems

• Developing an appropriate incentive system to
  reward performance
• Companies whose MACS display these four
  characteristics subscribe to a world view of the
  role of management labeled the Human Resource
  Management Model.

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Learning Objective 2

• Explain The Human Resources Model of Management.

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Human Resource Management Model of Motivation

• How were people viewed by the scientific
  management school?
• People were viewed as finding work objectionable,
• having little knowledge to contribute to the
  organization, and
• motivated only by money.

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Human Resource Management Model of Motivation

• How were people viewed by the Human Relations
  Movement?
• People were viewed as having needs other than
  money.
• Employees wanted respect and discretion over
  jobs.
• They wanted to feel that they contributed
  something valuable to the organization.

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Human Resource Management Model of Motivation

• What is the Human Resource Management Model of
  Motivation?
• It is the most contemporary management view of
  motivation.
• It is based on initiatives to improve the quality
  of working life.
• It introduces a high level of employee
  responsibility.

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Human Resource Management Model of Motivation

• How are people viewed by the Human Resources
  Model of Motivation?
• People do not find work objectionable.
• Employees want to participate in developing
  objectives and obtaining goals.
• They have a great deal of informational knowledge
  to contribute to the organization.

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Human Resource Management Model of Motivation

• People are creative.
• They are responsible.
• Individuals are motivated both by financial and
  non-financial means of compensation.
• People desire opportunities to affect change.

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Human Resource Management Model of Motivation

• The Human Resource Model is used as the basis for
  presenting the four behavioral considerations in
  MACS design.

Empowering employees
Ethical code of conduct
Mix of performance measures
Incentive system
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Ethical Code of Conduct and MACS Design

• First, a well-designed MACS should incorporate
  the principles of an organizations code of
  ethical conduct to guide and influence behavior
  and decision making.
• Ethics is a discipline that focuses on the
  investigation of standards of conduct and moral
  judgement.

Ethical code of conduct
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Ethical Code of Conduct and MACS Design

• The ethical framework embedded in system design
  is important because it will influence the
  behavior of all users.
• Who is the key user group?
• managers
• Often managers are subjected to pressures to
  suspend their ethical judgement.
• What are examples of these pressures?

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Ethical Code of Conduct and MACS Design

• Requests to tailor information to favor
  particular individuals or groups
• Pleas to falsify reports or test results
• Solicitations for confidential information
• Pressures to ignore a questionable unethical
  practice

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Ethical Code of Conduct and MACS Design

• What should system designers do?
• They should attempt to ensure the following
• The organization has formulated, implemented, and
  communicated to all employees a comprehensive
  code of ethics.

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Ethical Code of Conduct and MACS Design

• All employees understand the code of ethics and
  the boundary systems that constrain behavior.
• System exists, in which employees have
  confidence, to detect and report violations of
  the organizations code of ethics.

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Ethical Code of Conduct and MACS Design

• Hierarchy of Ethical Principles

Legal Rules
Societal Norms
Professional Memberships
Organizational or Group Norms
Personal Norms
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Ethical Code of Conduct and MACS Design

• How can organizations reduce ethical conflicts?
• by maintaining a hierarchical order of authority
• by the way the chief executive and other senior
  managers behave and conduct business

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Ethical Code of Conduct and MACS Design

• What are some common ethical conflicts?
• between the law and the organizations code of
  ethics
• between the organizations practiced code of
  ethics and common societal expectations
• between the individuals set of personal and
  professional ethics and the organizations code
  of ethics

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Ethical Code of Conduct and MACS Design

• between the organizations stated and practiced
  values
• Faced with a true conflict, the individual has
  several choices.
• What are some of these choices?
• Point out discrepancies to a superior and refuse
  to act unethically.

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Ethical Code of Conduct and MACS Design

• Point out discrepancies to a superior and act
  unethically.
• Take the discrepancy to a mediator in the
  organization, if one exists.
• Work with respected leaders in the organization
  to change the discrepancy.
• Go outside the organization to publicly resolve
  the issue.

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Ethical Code of Conduct and MACS Design

• Go outside the organization anonymously to
  resolve the issue.
• Resign and go public to resolve the issue.
• Resign and remain silent.
• Do nothing, and hope that the problem will go
  away.

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Learning Objective 3

• Apply the ethical control framework to decisions.

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Elements of an Effective Ethical Control System

• To promote ethical decision making, management
  should implement an ethical control system.
• What is an ethical control system?
• It is a system that reinforces the ethical
  responsibility of all of the firms employees.

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Elements of an Effective Ethical Control System

• What are the elements of an effective ethical
  control system?
• A statement of the organizations values
• A clear statement of the employees ethical
  responsibilities
• Training to help employees identify and deal with
  ethical dilemmas

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Elements of an Effective Ethical Control System

• Evidence that senior management expects employees
  to adhere to its code of ethics
• Evidence that employees can make ethical
  decisions without fear of reprisals
• Ongoing internal audit of the efficacy of the
  ethical control system

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Steps in Making an Ethical Decision
Gather Facts
Evaluate Alternatives
Make Decision
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Decision Model for Resolving Ethical Issues
Determine the Facts What, Who, Where When, How
Define the Ethical Issue
Identify Major Principles, Rules, Values
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Decision Model for Resolving Ethical Issues
Specify the Alternatives
Compare Values and Alternatives
Assess the Consequences
Make Your Decision
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Learning Objective 4

• Discuss Task and Results Control Systems.

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Motivation and Goal Congruence

• When designing jobs and specific tasks, system
  designers should consider three dimensions of
  motivation.
• What are these three dimensions?
• Direction
• Intensity
• Persistence

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Motivation and Goal Congruence

• Goal congruence is present when the actions that
  employees take and their personal goals are
  consistent with those of the organization.
• In a perfect world employers could rely on
  employees self control to monitor their own
  behavior.

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Types of Control Systems

• In the real world management often relies on
  different forms of behavioral control.
• What are the two most commonly used types of
  control?
• Task control
• Results control

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Task Control

• What is task control?
• It is the process of finding ways to control
  human behavior so that a job is completed in a
  pre-specified manner.
• There are two categories of task control
• Preventive control
• Monitoring

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Task Control

• In preventive control much, if not all, of the
  discretion is taken out of performing a task.
• Monitoring means inspecting the work or behavior
  of employees while they are performing a task.

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Results Control

• What is results control?
• It is the process of measuring employee
  performance against stated objectives.
• For results control to be effective, the
  organization must ...
• clearly define objectives which are then
  communicated, and
• design consistent performance measures.

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Results Control

• When is results control most effective?
• Organization members understand the
  organizations objectives and their contribution
  to those objectives.
• They have the knowledge and skill to respond to
  changing situations.
• The performance measurement system is designed to
  assess individual contributions.

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Learning Objective 5

• Understand the Balanced Scorecard and its
  applications.

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Using a Mix of Performance Measures

• What is the second major behavioral
  characteristic of a well designed MACS?
• Using a mix of short-term and long-term
  qualitative and quantitative performance measures
  (or the balance scorecard approach)

Mix of performance measures
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Using a Mix of Performance Measures

• Occasionally, employees are so motivated to
  achieve a single goal that they engage in
  dysfunctional behavior.
• What are some examples of dysfunctional behavior?
• gaming
• data falsification

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Using a Mix of Performance Measures

• The traditional focus of performance measures has
  been on quantitative financial measures.
• What are some quantitative non-financial
  measures?

Cycle Time
Yield
Schedule Adherence
Market Share
Customer Retention
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Using a Mix of Performance Measures

• Organizations can design performance measurement
  systems that encourage a desired behavior.
• Multiple performance measures should reflect the
  complexities of the work environment and the
  variety of contributions that employees make.

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The Balanced Scorecard

• What is the balanced scorecard?
• It is the first systematic attempt to design a
  performance measurement system that translates an
  organizations strategy into clear objectives,
  measures, targets, and initiatives.
• It integrates the measures used across
  organizations.

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The Balanced Scorecard

• The measures derived under the scorecard
  represent a balance between four measurement
  perspectives.
• What are these measures?
• External financial measures for stakeholders and
  customers such as Return on Capital Employed

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The Balanced Scorecard

• Customer measures such as retention and
  satisfaction
• Internal business process perspective measures
  such as cycle time
• Measures for learning and growth such as the
  number of new patents and the development of
  employee skills

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The Balanced Scorecard
Financial perspective How do we look to our
stakeholders?
?
Customer Perspective How do we look to our
customers?
Business Processes What processes are the value
drivers?
Organization Learning Are we able to
sustain innovation?
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Empowering Employees to be Involved in MACS Design

• What is the third major behavioral characteristic
  of a well designed MACS?
• It is empowering employees to be involved in
  decision making and MACS design.

Empowering employees
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Empowering Employees to be Involved in MACS Design

• Empowering employees requires two essential
  elements
• Allowing employees to participate in decision
  making
• Ensuring that they understand the information
  they are using and generating

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Developing Appropriate Incentive Systems

• What is the fourth major behavioral
  characteristic of a well designed MACS?
• Developing an appropriate incentive system to
  reward performance.

Incentive system
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Developing Appropriate Incentive Systems

• What are intrinsic rewards?
• They are those rewards that come from within an
  individual.
• They reflect satisfaction from doing the job.
• What are extrinsic rewards?
• They are rewards that one person provides to
  another to recognize a job well done.

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Performance Measurement and Reward System

• There are six attributes of a measurement system
  that must be in place to motivate desired
  performance.
• Employees must understand their job.
• Designers of the performance measurement system
  must make a careful choice about whether it
  measures employees inputs or outputs.

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Performance Measurement and Reward System

• The elements of performance that the performance
  measurement system monitors and rewards should
  reflect the organizations critical success
  factors.
• The reward system must set clear standards for
  performance that employees accept.

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Performance Measurement and Reward System

• The measurement system must be calibrated so that
  it can accurately assess performance.
• In certain situations the reward system should
  reward group rather than individual performance.

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Performance Measurement and Reward System

• What is incentive compensation?
• It is a reward system that provides monetary
  (extrinsic) rewards based on measured results.
• It is a pay-for-performance system that bases
  rewards on achieving or exceeding some measured
  performance.

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Types of Incentive Compensation

• Cash bonus
• Profit sharing
• Gainsharing
• Stock Options

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Types of Incentive Compensation

• What is a cash bonus?
• It is a payment of cash based on some measured
  performance.
• It is also called a lump-sum reward, pay for
  performance, and merit pay.
• What is profit sharing?
• It is a cash bonus that reflects the
  organizations, or an organization units,
  reported profit.

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Types of Incentive Compensation

• What is Gainsharing?
• It is a system for distributing cash bonuses from
  a pool when the total amount available is a
  function of performance relative to some target.
• What are the three most widely used Gainsharing
  programs?

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Types of Incentive Compensation

• Improshare (Improved Productivity Sharing)
• Scalon plan Base Ratio Payroll costs
  Value of goods or service
• Rucker Standard Payroll costs
  Production value

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Types of Incentive Compensation

• What is a stock option?
• It is a right to purchase a stated number of the
  organizations shares at a stipulated price (the
  option price).

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Conclusion

• Nathaniel Young now understands the four key
  behavioral characteristics that comprise a
  well-designed MACS.
• As a result, he is careful to
  involve employees in designing his
  new MACS.

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End of Chapter 10