Control System Tightness

Chapter 4

Introduction

Gaming, information manipulation, selective attention, illusion of control and

relationship transformation are the most salient unintended consequences of directive

performance management systems. These consequences exist due to limiting factors such as

ignorance, error, short-term concerns, fundamental values, self-fulfilling forecasts and

changes in social relationships.

Having a tight management control system (MCS) will make a possibility for the

organization to achieve its objective relatively by ensuring that its employees act in the

organization’s best interest. Once the main management decides to implement a strict MCS

with the concept of incentives coming along with the MCS, the main management must

realize that it is provided in many ways, either by a single form of control or by a

combination of reinforcing types of controls.

 Content

1. Tight Result Control

1.1 Definitions of desired results

Management control in terms of assuring that organizational objectives are

achieved. There are some unwritten rules that management has to consider before

starting tight result control, those are all about result dimension, performance target

and the desired results must be effectively communicated and internalized by those

whose behaviors are being controlled; and, if results controls are used exclusively in a

given performance area, the measures must be complete.

 Congruence. Because from the beginning the management did not understand

what the actual goals of the organization were before declaring results control,

this causing the results control system to have congruence problems.

 Specificity. The degree of tightness of results control also depends on having

performance expectations described in specific terms. But in many

performance areas, such as with respect to sustainability and environmental

performance, control is loose(r) because organizations do not set specific,

quantified targets and merely evaluate the global performance area

subjectively

 Communication and internalization. For results controls to be tight,

performance targets must also be communicated effectively and internalized

by those charged with their accomplishment. The degree to which goals are

understood and internalized is affected by many factors, including the

qualifications of the employees involved, the perceived degree of

 controllability over the measured results areas, the reasonableness of the goals,

and the number of participants allowed in the goal-setting processes.

 Completeness. Completeness means that the result areas defined in the MCS

include all the areas in which the organization desires good performance and

over which the employees involved can have some impact. Thus, results-

control systems should capture, as completely as possible, all information

about employees’ effects on firm value, weighted properly, so that employees’

efforts are appropriately balanced across the multiple dimensions of their jobs.

This picture is to describe that control system has a big impact to the company can run well their

strategy and achieving company’s objectives

1.2 Performance measurement

Performance measures are used directly as tools considering to tight results

control. A results-control system that is used to apply tight control requires measuring

precise, objective, timely, and understandable qualities that are met to a high degree.

If the measurements fail in any of these areas, the control system cannot be

characterized as tight because behavioral problems are likely

1.3 Incentives
 The target in this case is a measure for management to get incentives.

Managers who failed to achieve annual profit targets by even a small amount received

“paltry” bonuses, while those who exceeded them earned “hefty” payouts. Most

organizations, including non-profit and public sector organizations, appear to make

the link between incentive compensation and performance more direct and more

definite. In many cases not just only in Indonesia but also in other countries placed

this type of control on their company. In some companies, they not just imposed

incentives while getting the target but also make punishment if their management fails

in their operation. Many compensations plan reward or punish employees for factors

they cannot control.

2. Tight Action control

2.1 Behavioral Constraints

The meaning of behavior here is human behavior in a work environment and

determines its impact on job structure, performance, communication and

motivation and result to the objectiveness of the organization. Behavioral

constraints, either physical or administrative, can produce tight control in some

areas of an organization. Physical constraints come in many forms, ranging from

simple locks on desks to elaborate software and electronic security systems,

provide cctv in all area in workplace. Administrative constraints also provide

widely varying degrees of control. Restricting decision authority to higher

organizational levels provides tighter control if it can be assumed that higher-level

personnel will make more reliable decisions than lower-level personnel

No simple rules can be provided as to the degree of control they provide

except, perhaps, that extra protection usually costs more but not always going to

give good impact at all. Some problem will occure when the behavioral constraints
 is too tight, professional employee will unmotivated because they after all

struggling with untrusted feelings by the organization.

2.2 Preaction reviews

We can say that MCSs tight if the reviews are frequent, detailed, and

performed by diligent, knowledgeable reviewers. Preaction reviews must always be

tight in areas involving large resource allocations, the reason for this is because many

investments are not easily reversible and can, by themselves, affect the success or

failure of an organization. Tight preaction reviews involve formal scrutiny of business

plans and requests for capital by experts in staff positions, such as in the Finance

Division, and multiple levels of management, including top management.

But here, about what we called a company with very tight preaction reviews

which has done is doing preaction reviews even before employees can spend even

small amounts of money. Many managements in case to make smallest expense as

possible, they make an unpredictable rule, keeps an eerily tight rein on expenses like

what founder and CEO Jeff Bezos from amazon did for himself and to the

management; eschewing color printers in favor of trusty old black-and-white models.

No one flies first class (though Bezos sometimes rents private jets at his own

expense). Experiments are hatched and managed by the smallest teams possible; if it

takes more than two pizzas to feed a work group, Bezos once observed, then the team

is too big. Offices still get cheap desks made of particleboard door planks, a 1990s

holdover that Bezos refuses to change.

2.3 Action accountability

 Actually, Action accountability have a close manner to tight results controls to

produce tight control. Holding employees accountable helps them to know the

satisfaction of achieving a goal and performing to a standard. The amount of control

generated by action accountability controls depends on characteristics of the

definitions of desirable and undesirable actions, the effectiveness of the action

tracking system, and the reinforcements (rewards or punishments) provided.

2.3.1 Definitions of Actions

The definitions of actions must be congruent, specific, well

communicated, and complete if company want to achieve tight action-

accountability control. What it meant by congruence is the performance of the

actions defined in the control system will indeed lead to the achievement of the

intended organizational objectives. Tighter control can also be achieved by

making the definitions of actions specific in the form of work rules (such as

prohibiting alcohol during work) or policies (such as the requirement to obtain

three competing bids before releasing a purchase order), as opposed to relying

solely on less specific guidance (such as to exercise good judgment or to treat

colleagues and customers with respect). Tight action control depends on the

understanding and acceptance of the work rules, policies, or guidance by those

whose behaviors are being controlled. If the employees involved do not

understand the rules, policies, or guidance, they will be inconsequential. If the

employees do not accept the rules, they may try to find ways to avoid them.

Understanding and acceptance can be improved through communication and

training and by allowing employees to participate in the development of the

rules, policies, or guidance.

 The example when a company has a tight action-accountability control is

when an employee can say that “in workplace, we have procedures for

everything”. Although tight action controls can be relied on extensively for the

proper functioning of organizations in certain environments, such as banks,

nuclear power facilities, hospitals, and critical healthcare homes, they are not

effective in all circumstances. In some situations, the desired actions cannot be

defined nearly completely because the tasks are complex and require

considerable discretion or creativity. When the desired actions cannot be

properly defined, action-accountability controls will not produce tight control;

they may even be counterproductive, as they are likely to limit professional

judgment, stifle creativity, erode morale, and cause decision delays and slow

strategic responses to changing market conditions

2.3.2 Action Tracking

by improving the effectiveness of the action-tracking system can also

make tighter control in an action-accountability control system. Employees who

are certain that their actions will be noticed, and noticed relatively promptly,

will be affected more strongly by an action accountability control system than

those who feel that the chance of getting “caught” is small. Constant direct

supervision is one tight action-tracking method. Detailed audits of action reports

are another (detailed reviews of expense reports). For example, banks or the

regulator can employ so-called analytics sophisticated technological tools for

analyzing millions of trades for patterns that suggest suspicious activity by

comparing a broker’s or investment advisor’s trades against significant events

such as merger announcements to flag possible insider trading, say:

 2.3.3 Action Reinforcement

Control in an action-accountability control system can also be made

tighter by making rewards or punishments system more significant. In general,

significance varies directly with the size of the reinforcement. Whereas rewards

(incentives) are the most common form of reinforcement that organizations

provide in results-control settings, punishments (disciplinary actions) are

common in action-control settings because they often involve employee

violations of rules and procedures. Although, as with rewards, different

individuals react differently to identical punishments, one type of significant

disciplinary action – the threat of dismissal – is likely universally understood.

The way commercial airlines control the actions of their pilots provides a good

example of a tight action-accountability control system. The pilots are given

detailed checklists specifying nearly all required actions, not only for normal

operations but also for all conceivable contingencies, such as engine failure, fire

on board, wind shear, and hijacking. Intensive training helps ensure that the

procedures are understood, and frequent checking and updating help ensure that

they remain in the pilot’s active memory. The tracking of irregular actions is

precise and timely, as all potential violations are thoroughly screened by

objective investigators. Finally, reinforcement is significant because pilots are

threatened with severe penalties, including loss of profession, not to mention the

fear for loss of life when accidents do happen.

 Even the most detailed action specifications can be undercut by the

lack of action tracking and reinforcement. For example, rules and procedures

will not be followed if top management does not show interest in having them

followed. Thus, for action accountability to be tight, all of the elements of the

action-control system – definitions of actions, action tracking, and

reinforcement – must be properly designed. Moreover, action controls are

sometimes seen as hindering efficiency. As such, reengineering efforts focused

on improving efficiency sometimes imprudently downgrade preaction reviews,

segregation of duties, paper trails, and reconciliations as non-value-added.

While these controls might seemingly not add value, they can help prevent

losses that might arise from accidents or misconduct.

Surveys of practice, however, suggest that sophisticated frauds have

been on the rise, in part explained by an increase in computer-based transactions

as part of complex IT systems that handle virtually all company transactions

including sales accounts, cost accounts, personnel administration, and general

ledger. Although computer-based transactions are now common place in most

organizations, control of such transactions is sometimes loose (compared to

control of “old-economy” paper-based transactions). There is no reason why

control of computer-based transactions cannot be tight, even tighter than paper-

based transactions; but due to system complexity, companies do not always

fully understand the control risks involved.

3. Tight personnel/cultural controls

In some situations, MCSs dominated by personnel/cultural controls also can

be considered tight. In charitable and voluntary organizations, personnel controls

usually provide a significant amount of control, as most volunteers derive a keen

sense of satisfaction just from doing a good job, and thus are motivated to do well.

Tight personnel/cultural controls can also exist in for-profit businesses. They are

common in small, family-run companies where personnel/ cultural controls may be

effective because of the overlap or congruence between the organizational interests

and those of the individuals on whom it must rely for pursuing them.

Some organizations use multiple forms of personnel/cultural controls that, in

combination, produce tight control. For example, among the controls used in

production areas of Wabash National Corporation, a truck-trailer manufacturer located

in Lafayette, Indiana, are:

● Walk and talk interviews in which job applicants get to observe the frenetic factory

pace.

● Group incentive plans, including a profit-sharing plan that gives employees 10% of

after-tax earnings and a retirement plan that bases contributions on profit margins.

● Required training. New employees are strongly encouraged to take two specified

Wabash improvement classes on their own time and are rewarded with pay raises for

doing so. Supervisors are promoted only after they take special classes and pass a test.

In many instances, indeed, the degree of control provided by

personnel/cultural controls alone is less than tight. In most firms, the natural overlap

between individual and organizational objectives is smaller than that in family firms

or tight-knit organizations. Moreover, a divergence between individual and

organizational objectives often comes unexpectedly, although, as studies suggest, it is

not a rare occurrence. For example, a survey by KPMG Forensic suggests that “the

typical company fraudster is a trusted male executive who gets away with over 20

fraudulent acts over a period of up to five years or more.” More generally, “61 percent

of fraudsters are employed by the victim organization; of these, 41 percent were

employed there for more than 6 years; in 70 percent of frauds, the perpetrator colluded

with others.

The steps that might be taken to increase the strength of personnel controls are

difficult to assess and potentially unreliable. Factors such as education, experience,

rank, and tenure are not unequivocally reliable predictors of misconduct. Or, to

combine the prior section with this one by way of a quote from the KPMG report:

“Having good internal controls is important, but with any control you are ultimately

relying on the human element. All told, however, tight control probably cannot be

achieved with the use of personnel/cultural controls alone, and tight control will

inevitably involve relying on a combination of action, results, and personnel/cultural

controls.
 Conclusion

This paper has breakdown the important characteristic of MCSs (degree of

tightness). In some organizations, a particular type of control can be replaced or

supplemented with another type that provides a better fit with the situation for the purpose of

tighter controls. Some organizations, perhaps because they have suffered major losses due to

breaches of authority and weak internal controls, tighten controls by recalibrating their results

controls toward using additional detailed, procedures-based action controls. Others, often as

they grow and become more decentralized, go the other direction by placing increasingly

more emphasis on results controls.

But managers are not limited to tinkering with the characteristics of just one form

of control or to replace one for another. To tighten controls, organizations must inevitably

rely on multiple forms of controls and align them with one another.
 It should also be recognized that organizations sometimes deliberately choose to

loosen their controls. They do so because an inappropriate use of controls causes harmful side

effects, such as operating delays or employee frustration and demotivation. These side effects

cause many to have negative feelings when they hear the mere mention of tight control

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