Management Control Systems

Chapter 2: Results Controls

Wim Van der Stede

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

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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 -3-
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 -4-
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: 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 -5-
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 -6-
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 -7-
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 -8-
Pros and cons of results controls ...
PRO
 Behavior can be influenced
while allowing significant
autonomy.
 They yield greater employee
commitment and motivation.
 They are often inexpensive.
– e.g. performance measures
are often collected for
reasons not directly
related to management
control.
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003
CON
 Often less than perfect indicators of
whether good actions have been taken.
 They shift risk to employees (because
of 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
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