Chapter 9 Solutions

Chapter 9: Behavioral and Organizational Issues in Management Accounting and Control Systems
Chapter 9
Behavioral and
Organizational Issues
in Management
Accounting and
Control Systems
QUESTIONS
9-1
In the context of a management accounting and control system, control refers to

the set of procedures, tools, performance measures, systems and incentives that
organizations use to guide and motivate all employees to achieve organizational
objectives.
9-2
The four stages that are needed to keep the organization in control are:
1. Plan: develop an organizations objectives, choose activities to
accomplish the objectives, and select measures to determine how well the
objectives were met;
2. Do: implement the plan;
3. Check: monitor by measuring and evaluating the systems current level of
performance; compare feedback about the systems current level of
performance to the planned level in order to identify discrepancies and
prescribe corrective action;
4. Act: take appropriate actions to return the system to an in-control state.
9-3
The two broad technical considerations that designers of management accounting

and control systems must address are the relevance of the information generated
and the scope of the system.
9-4
When addressing the relevance of a MACS, designers should develop a system that
provides information that is timely and accurate enough to be relevant and useful
for decision making. The system should provide a consistent framework for the
organization, in the sense that the language used and the methods of producing
management accounting information do not conflict within various parts of the
organization. Finally, employees should be able to use the systems available
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Atkinson, Solutions Manual t/a Management Accounting, 6E
information in a flexible manner so that it can be customized for the decisions at

hand.
9-5
The four major behavioral considerations in MACS design are: (1) embedding
the organizations ethical code of conduct into MACS design, (2) using a mix of
short- and long-term qualitative and quantitative performance measures (or the
balanced scorecard approach), (3) empowering employees to be involved in
decision making and MACS design, and (4) developing an appropriate incentive
system to reward performance.
9-6
The scientific management view of motivation is that most people find work
objectionable, money is the key to inducing performance, and people have little
desire to be creative on the job or make good decisions. In this view,
management must tightly monitor and control employee behavior and break
down tasks so employees need only focus on production, not decision making.
9-7
The human relations movement view of motivation is that people have needs
that go well beyond performing simple repetitive tasks and that money is only
one aspect of what people desire. In this view, employees desire respect, a
feeling that they contributed something valuable to the organization, and
discretion at their jobs. Managements task is to develop a better working
environment for people with the goal of improving employee morale, job
satisfaction, and performance.
9-8
The human resources model of motivation view is that people do not find
work objectionable. Instead, they want to participate in decision making and
have specific goals that they are trying to achieve. Individuals have information
and knowledge that they can contribute to the organization; further they are
creative, responsible, and wish to improve the organization. The task for
management is to create a working environment that will allow creativity to
blossom.
9-9
There are a number of choices that individuals can make when ethical conflicts
arise. These include: point out a discrepancy or problem to a superior and refuse
to act unethically, point out a discrepancy to a superior and act unethically, go to
an ombudsperson or mediator, work with respected leaders in the organization to
change the discrepancy, go outside the organization publicly, go outside the
organization anonymously, resign and go public, resign and remain silent, and do
nothing and hope that the problem will dissolve.
9-10 An ethical control system is a system that promotes ethical decision making in an
organization. Key elements include the following:
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A statement of the organizations values and code of ethics.
A clear statement of the employees ethical responsibilities for every job

description and a specific review of the employees ethical performance as
part of every performance review.
Adequate training to help employees identify ethical dilemmas in practice

and learn how to deal with the dilemmas.
Compelling evidence that senior management expects organization

members to adhere to its code of ethics. This means that management must
provide a statement of the consequences of violating the organizations
code of ethics, establish a means to deal with violations of the code of
ethics, provide visible support of ethical decision making, and provide a
private line of communication from employees directly to the chief
executive officer, chief operating officer, head of human resource
management or board of directors.
Evidence that employees can make ethical decisions or report violations of

the organizations stated ethics without fear of reprisals from superiors,
subordinates, or peers in the organization.
An ongoing internal audit of the efficacy of the organizations ethical

control system.
9-11 The three key dimensions of motivation are: direction, the tasks on which an
employee focuses attention at work; intensity, the level of effort expended by
the employee; and persistence, the amount of time an employee will stay with a
task.
9-12 Goal congruence occurs when individuals are able to align their goals at work
with those of the organization.
9-13 Managers use diagnostic control systems to monitor organizational outcomes and
correct deviations from predetermined performance standards. A diagnostic
control system tends to run in a routine way, without regular monitoring by a
manager. Interactive control systems, in contrast, rely heavily on dialogue among
managers and subordinates about data generated by the system and steps to take
based on the data. In interactive control systems, managers must spend more
time monitoring the decisions and actions of their subordinates.
9-14 Task control is the process of finding ways to control human behavior so a job is
completed in a prespecified manner. Results control focuses on measuring and
comparing employee performance against stated objectives. Task control is most
appropriate when there are legal or safety requirements, when employees handle
liquid or precious assets, or when the organization can control the environment
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sufficiently to eliminate the need for judgment. Results control is most effective
when organization members understand the organizations objectives, and have
the knowledge and skill to respond to changing situations with sound decisions
and actions. In addition, the performance measurement system should be
designed to assess individual contributions, to provide suitable motivation.
9-15 The two categories in task control are preventive control and monitoring. In
preventive control, discretion in performing a task may be minimized because of
the precision required or the nature of the materials involved. Monitoring
involves inspecting the work or observing the behavior of employees while they
are performing a task.
9-16 Quantitative financial measures of performance in a manufacturing organization
include:
cost per unit
profit per unit
return on investment
9-17 Quantitative financial measures in a service organization include:
cost of service
profitability of service
service revenue
9-18 Quantitative nonfinancial measures of performance in a manufacturing

organization include:
yield rate
quality
schedule adherence
number of process problems
defective rate
on-time delivery percentage
9-19 Quantitative nonfinancial measures of performance in a service organization

include:
number of customer complaints (in a restaurant)

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number of errors in processing claims (in an insurance organization, for

instance).
number of repeat customers (for all service organizations)
percent of flights with on-time arrival (in the airline industry)
9-20 Qualitative measures of performance include:
image of a product
reputation of a product
measures of customer satisfaction.
9-21 Gaming a performance indicator occurs when an individual alters his or her
actions in an attempt to manipulate a performance indicator through job-related
acts.
9-22 Data falsification occurs when an individual falsifies information in favor of
himself/herself. It is considered illegal.
9-23 The single most important factor in making major changes to an organization is
having top management support, often at the level of the CEO and other senior
managers. The change process often relies on a champion who is charged with
spearheading the process.
9-24 Earnings management occurs when managers knowingly manipulate reported
income. Smoothing, which is the acceleration or delay of a preplanned flow of
data without changing the organizations activities, is an example of earnings
management. For example, a manager who wants to meet a net income target
may defer expenses to the next period or book future revenues in the current
period.
9-25 Empowering employees in MACS design requires two essential elements
allowing employees to participate in decision making and ensuring employees
understand the information they are using and generating.
9-26 The two interrelated behavioral issues are (1) designing the budget process,
which includes how budgets should be determined, who should be involved in
the budgeting process, and the level of budget difficulty, and (2) influencing the
budget process, which includes how people try to influence or manipulate the
budget to their own ends.
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9-27 The three most common methods of setting a budget are: (1) authoritative
budgeting in which a superior tells subordinates what their budget will be
without requesting input from the subordinates, (2) participative budgeting in
which the setting of the budget is done jointly between a superior and
subordinates and (3) consultative budgeting in which a superior asks
subordinates for their ideas about the budget but then determines the final budget
alone.
9-28 Research has shown that the most motivating type of budget is one that is
tightthose with targets that are perceived as ambitious, but attainable.
9-29 A stretch target is one that exceeds a previous target by a significant amount and
usually requires an enormous increase in effort to achieve.
9-30 Budget slack occurs when subordinates (a) ask for excess resources (more than
needed to accomplish budget objectives) and (b) distort information by claiming
they are not as efficient or effective at what they do, thus lowering managements
performance expectations of them.
9-31 An intrinsic reward is a benefit that a person experiences, without the
intervention of anyone else, as a result of doing a job.
9-32 An extrinsic reward is a reward that one person provides to another person in
recognition of job performance.
9-33 Incentive compensation is a monetary reward that is based on measured
performance.
9-34 The six attributes of effective performance measurement systems are: (1) the
person must understand the job and the reward system, and believe that the
system measures what employees can control or contribute to the organization,
(2) the performance measurement system must reflect careful choices about
whether it measures employees inputs or outputs, (3) the jobs performance
measures should reflect the organizations critical success factors, (4) the
performance measurement system should set clear performance standards or
targets that are acceptable to employees, (5) the performance measurement
system should accurately assess performance, and (6) the reward system should
focus on individual or group rewards depending on the nature of the job.
9-35 Organizations where employees have been given the responsibility to make
decisions are best suited for incentive compensation systems because these
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organizations create the environment where the individuals decision making can
affect the organizations outcomes.
9-36 A cash bonus is a cash reward tied to measured performance.
9-37 Profit sharing is a cash bonus incentive compensation plan where the total of all
cash bonuses paid to all employees is determined by a formula involving the
organizations, or an organization units, reported profit.
9-38 Gain sharing is a cash bonus incentive compensation plan where the total of all
cash bonuses paid to all employees is determined by a formula involving
performance relative to some target.
9-39 In a stock option plan, employees deemed to be able to affect the value of an
organizations shares are given the option to purchase those shares at a specified
price that is usually higher than the share price at the time the option is issued.
EXERCISES
9-40 The mission statement becomes a basis for the organizations accountability to those
stakeholders. The notion companys value is ambiguousperhaps deliberately. It
may be ambiguous because it is not expected to be taken seriously, or it may be
ambiguous so that if it is taken seriously it makes no real commitment. The following
interpretations might be made of companys value: by customersservice, quality,
and cost; by employeescompetitive wages, good working conditions, and security;
by shareholdersa competitive rate of return on investment; and by society
conformance to laws and progressive social activities, such as affirmative action.
9-41 When addressing the relevancy of a management accounting and control system,
designers should develop a system that provides information that is timely and
accurate enough to be relevant and useful for decision making. Information that
is insufficiently accurate will lead to errors in evaluating profitability of cost
objects and may lead to poor decisions. Timely information is important because
the most accurate information that appears after evaluations or decisions are
made is irrelevant with respect to those evaluations or decisions. The system
should provide a consistent framework for the organization, in the sense that the
language used and the methods of producing management accounting
information do not conflict within various parts of the organization. For example,
having two divisions with different costing systems makes it more difficult to
understand and compare results across divisions. If one division of an
organization uses activity-based costing principles and another division,
especially one that is very similar in goals and function to the first, uses volumebased overhead allocation methods, the information system does not meet the
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consistency criterion. Finally, employees should be able to use the systems

available information in a flexible manner so that it can be customized for the
decisions at hand. If the management accounting and control system cannot
accommodate the specialized needs of each major user, users may develop ad
hoc local systems, which can lead to poor decisions or confusion in
communications between the users and the rest of the organization.
9-42 The scientific management view of motivation sees employees as the vehicles by
which managements goals can be accomplished. People are thought of as simply
means to an end, and management treats them almost like machines by timing
their actions and trying to make them work more and more efficiently. The
underlying philosophy is that most people find work objectionable, dislike
decision making or creativity, and find money to be the driving motivator.
The human relations school understands that employees want much more from
work, including respect, autonomy, and satisfaction; financial compensation is
just one of the things workers desire. Management attempts to create a better
work environment to increase employees satisfaction and performance.
The human resources view goes even further than the human relations school in
that employees are seen as key suppliers of ideas and information about how
their jobs and the work environment can be improved. This view holds that
employees find work enjoyable and desire to make decisions, develop
objectives, and attain goals. Individuals are motivated by financial and
nonfinancial compensation. Individuals are assumed to have considerable
knowledge about their jobs, and to be highly creative, ethical, responsible, and
supportive of change in their organizations. The task for management is to create
a working environment in which employees can use their information to its
fullest ability and in which creativity can flourish.
9-43 The hierarchy of ethical considerations are (1) legal rulesactions prohibited by
law, (2) societal normsactions that society has deemed unacceptable, (3)
professional membershipsactions that professional memberships discourage,
(4) organizational or group normsactions that are unacceptable to an
organization or group, and (5) personal normsactions that each individual
deems unacceptable. The hierarchy is listed in descending order of authority.
9-44 If the organizations code of ethics is stronger than the individuals, then the
employee can either resign or adhere to the organizations rules. In some cases,
the organization will strongly enforce its code, and if the individual complies,
there may be no problem. If the individuals code of ethics is stronger than the
organizations, the individual can quit, do nothing and try to live with the
situation, or try to work with the organization to change its code or norms of
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behavior. Employees faced with ethical conflicts should document the events and
discussions and list the parties involved.
9-45 First, the individual must make sure that the facts are correct and that there is
clearly a conflict. The individual should speak to superiors and determine
whether the conflict is institutional or reflects the actions and beliefs of a few
individuals. If there is a true conflict, the individual can (1) point out the problem
to superiors and refuse to act unethically, (2) point out the problem to superiors
and act unethically, (3) talk to an ombudsperson (mediator in the organization),
(4) work with organizational leaders to resolve the problem, (5) go outside the
organization to publicly resolve the issue, (6) go outside the organization
anonymously to resolve the issue, (7) resign and go public, (8) resign and remain
silent, and (9) do nothing, and hope the problem will go away. Most experts
recommend alternative (4) but any of the alternatives may be appropriate
depending on the circumstances.
The organizations stated values may conflict with practiced values if individuals
see unethical or illegal behavior practiced by co-workers or the organizations
leaders, and infer that such behavior is accepted and sanctioned. Organizational
leadership therefore plays a critical role in fostering a culture of high ethical
standards.
9-46 Any control situation is useful here. The exercise is intended to provide an
opportunity to discuss the appropriate matching of the approach to control with a
situation. For example, some governments are now advocating that people who
have been convicted of drunk driving have their vehicles equipped with a device
that prevents the vehicle from being started unless the driver can accomplish a
series of dexterity tests on a keypad. This is an example of preventive control.
9-47 Many aspects of work require a variety of actions and decisions, and using only
one measure of performance will not capture the complexity of the employees
job. The advantage of having multiple measures is that employees will not focus
on a single measure and only perform those acts that maximize performance on
that measure.
The performance measurement system conveys what the organization values,
how the individual contributes to what the organization values, and what the
employee should do to earn personal rewards and satisfaction. Therefore, if the
performance measurement system does not measure some facet of performance,
the system not only provides no direct motivation to the employee, who receives
no personal benefit in pursuing unmeasured performance goals, but also implies
to the employee that the particular facet of performance is irrelevant. An example
is a grocery store clerk. If the clerk has been told that accuracy and speed are
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critical, the clerk may infer that answering customer questions and making
simple remarks to the customer reflecting common courtesy are unimportant.
9-48 What performance is measured, how it is measured, and what rewards follow
from measured performance define the causal link between performance and
rewards. Without a clear link, employees do not understand how their effort
results in increased rewards and personal satisfaction.
9-49 If the performance measurement system includes factors beyond the employees
control, motivation likely will decrease. However, one might argue that many
people held responsible for nominally uncontrollable performance factors will
develop means to control these factors.
9-50 The president, who controls overall policy and sets the organizations direction,
should be evaluated and rewarded based on the trend of key success factors such
as profitability, customer satisfaction, employee satisfaction, relations with
suppliers, and image in the community. The middle manager, who designs and
puts in place systems, should be rewarded based on the overall contribution of
the system to the organizations key success factors. These measures might
include: the time between when an order is taken and when it is filled, the cost of
filling an order, overall system accuracy, and the performance of this system
relative to competitors systems. The employee who fills orders operates within
the existing system. This person should be evaluated based on the speed and
accuracy of work done relative to the potential of the existing systems and the
suggestions made that are used to improve the system. In general, the
performance measurement systems are similar in their focus on the same broad
factorsthe organizations critical success factors. However, they differ in
focusing on what each manager controls.
9-51 Some management thinkers believe that the best type of organizational culture is
one in which pay for performance is unnecessary. In this view, people will
perform well if the owners pay the people a good salary. Other management
thinkers believe that tying rewards to performance in the form of bonuses or
other incentives is highly motivating because people will exert extra effort if they
know they will receive a bonus for good performance. This may lead to greater
goal congruence between individuals and the organization, although the empirical
evidence is mixed regarding this claim.
9-52 The key difference is that gaming does not involve any falsification of data or
information, only the altering of ones actions to do better on a performance
indicator.
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9-53 Budget slack can be created by budgeting excess resources that are not really
needed to attain the goals of the budget. Slack also can be created by employees
who understate their performance capabilities and choose a lower level standard
or budget than they know they can attain. Creating slack is a gaming activity
designed to facilitate achieving high performance evaluations.
9-54 Workers may believe gaming behavior is an appropriate response (to survive in
an organization) if the organization has set up a performance measure that is
impossible for employees to attain. For example, in an assembly line, if the
average worker can make 10 units of output an hour, but management raises the
standard to 16 per hour, workers may take a number of actions that they
normally would not take if the standard were reasonable. Such actions would
include lowering the quality of output to meet the standard, cutting deals with
high producing coworkers to supply them with output, etc. In this situation,
workers may simply be trying to keep their jobs. Such behavior will continue
until management employs a reasonable standard.
Managers may believe it is appropriate (necessary) to game the budgeting
process by building in budget slack when they know through experience that
upper management automatically reduces the submitted budget. If managers
submit budgets reflecting an accurate estimate of their need to accomplish the
companys stated goals, they are unlikely to achieve the goals with a reduced
budget.
9-55 The employee who participates in decision making will generally be more
committed to the decisions made (such as attaining the participatively set budget)
and often will experience greater job satisfaction and higher morale as a result.
The result can be enhanced productivity, which benefits the organization. In
addition, workers may have critical information that can greatly benefit
management. For example, workers still perform the major portion of work in
non-automated industries, so they have superior knowledge regarding how to
improve products and processes.
9-56 Participation in the budgeting process involves a subordinate setting the budget
with a superior jointly. In other words, the superior and the subordinate meet and
negotiate the budget directly. Consultation, on the other hand, involves the
superior seeking the subordinates input on the subordinates budget, but no joint
decision-making occurs. Once the superior has the subordinates input, the
superior makes the final budget decision.
9-57 From the employees (subordinates) perspective, the benefits from building in
slack are twofold. First, the employee may be able to obtain excess resources to
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achieve desired goals. This may take a lot of pressure off the employee and
reduce job anxiety. Second, senior management may lower their work
expectations of the employee. This may also lead to lower pressure on the
employee to perform. Both of these types of slack building are designed to
reduce job stress for the employee. However, if incentives are graduated in such
a way that achieving higher and higher goals provides the employee with more
and more compensation in the form of bonuses, then the employee may lose
income by selecting lower goals.
From senior managements point of view, employees who build in slack are
either using unnecessary resources to achieve a goal that should have been
achievable with fewer resources, or they are understating their performance
capabilities. Thus, the organization is either not running as efficiently as it can, or
is losing potential productivity from employees who are not working as hard as
they can. In some cases, senior management may believe that employees build in
slack to relieve job pressure. If burnout of employees has been occurring in the
organization then perhaps senior management may be more forgiving and view
some slack building as necessary to keep their employees from quitting.
9-58 Budgeting games occur when managers or other employees attempt to
manipulate information and targets to achieve their specific goals, such as
achieving the assigned objectives with the allotted funding, or attaining as high a
bonus (given that there is a bonus tied to budget attainment) as possible. One
well-known way that employees engage in budgeting games is through the
participation process. For instance, employees might ask for resources above and
beyond what they need to accomplish their budget objectives. This results in a
misallocation of resources for the organization as a whole. Employees may also
distort information by underrating their efficiency or effectiveness, thereby
attempting to lower managements expectations of their performance. If
employees succeed in this type of negotiation, they will find it easy to meet or
exceed their budgeted objectives. Again the organization suffers, because it is not
obtaining the most accurate information available to assess and improve its
operations. Both requiring excess resources and distorting performance
information fall under the heading of creating budget slack.
9-59 This question distinguishes between people who are driven exclusively by
extrinsic rewards, most often monetary, and people who receive satisfaction by
intrinsic rewards as well. This is a matter of individual preference but provides
the opportunity for people who do not value intrinsic rewards to understand why
some people value them.
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Extrinsic rewards are rewards provided to the individual by someone else.

Examples are bonuses, promotion, and recognition. Monetary rewards such as
cash, trips, and stock options convey a direct value. Nonmonetary rewards, such
as recognition in the company newsletter, convey value to people who take pride
in having their accomplishments recognized by others. An intrinsic reward is a
benefit that a person experiences, without the intervention of anyone else, as a
result of doing a job. It reflects satisfaction from doing a job well, satisfaction
from growth opportunities, or pleasure from helping others learn or grow.
9-60 The choice of the mix of performance measures and the decision about whether
those measures are input-based, output-based, or a combination of measures
make up one of the most difficult tasks in the design of performance
measurement and compensation systems. In general, the greatest alignment
between employees and the organizations interests is provided when the
performance measurement system monitors and rewards outcomes or employee
outputs that contribute to the organizations success. Rewarding a person based
on outputs such as good units, or outcomes such as customer satisfaction, forces
the person and the organization to direct attention and behavior toward
understanding and doing what promotes organization success. However,
outcomes and outputs may reflect circumstances and conditions that are beyond
the employees control, and when they do, the weaker link between individuals
efforts and measured results decreases the motivation provided by the reward
system. In addition, it may be impossible to measure outcomes consistently and
outcomes may be too expensive to measure.
Under circumstances where outcome measurement is problematic, organizations
often choose to monitor and reward inputs (such as employee learning,
demonstrated skill, and time worked). Knowledge-based pay remunerates based
on an employees training and job qualifications, which can be upgraded by
training. The employees compensation is based on time input and an hourly rate
or salary reflecting the deemed level of skill input, and salary increments can
result from new knowledge rather than a promotion or a job change. For
example, in some manufacturing organizations, employees can take on-site
classes at night to increase their skills. Once these classes are completed, and the
new skills mastered, the employees are moved to a higher wage level.
Governments often use knowledge-based pay to motivate public servants to
improve their skills. For example, a social worker might be given a 10% salary
increase, within the same job, for acquiring a diploma in social work.
9-61 This is a deep issue that has been the subject of many articles. The purpose of
the question is to identify the issues rather than to reach any definitive
conclusion. There are two clear requirements to this questioncomparing the
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pay of this executive to other executives (the relative level) and the absolute pay
of executives in general (the absolute level).
Business Week and Fortune magazines, among others, have published many
articles that compare the compensation of executives with the compensation of
other executives. These articles define various measures of success, such as
growth in the value of the firms share price, and look at the correlation between
executive compensation and these success measures. Then the articles rank the
executives based on how closely the change in compensation is related to the
change in the success measure. This approach hinges on the ability to define and
measure appropriate success measures. This comparison focuses on whether the
pay was appropriate given the level of the organizations performance relative to
other organizations.
However, the issues in compensation are deeper and require a consideration of
the purpose, effect, and scope of motivation. Do these people really need to be
paid the amounts that they command to do the work that they do? A competitive
issue concerns what we have to pay, given the market opportunity for this
executive, to keep this person. However, a related issue, which cannot be solved
in the short run, is whether these people are worth the compensation they are
receivingperhaps they are worth more or less. An obvious, and related, issue is
the level of compensation paid to professional athletes.
Approaches might be to compare the compensation of the president with the
salary of a managing partner in a comparably sized public accounting or
consulting firm, or to the salary of a senior partner in a law firm.
9-62 Incentive compensation plans are suitable when employees have the skill and
authority to react to conditions and make decisions, and in organizations subject
to changing conditions. A cash bonus is often related to activities oriented to
short-run performance that should be rewarded immediately to provide a
reinforcement effect. Cash bonuses are best tied to measures of achieved
operating performance such as quality improvement, sales increases, and success
at short-run cost control. These bonuses can be paid to individuals or groups.
to changing conditions. Profit sharing is used to focus organization members
engaged in team activities to improve the organizations short-term performance.
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to changing conditions. Gain sharing is best used when there is a visible and
agreed performance standard, and the employees can work as a group to improve
performance relative to that standard.
to changing conditions. Stock options are best used to focus attention of senior
people, who can affect the organizations long-run performance by their
decisions.
9-66 The car design group is deliberately created to design a car. There is no place for
individual stars in this groupthe key is to develop a successful product.
Therefore, the individuals in that group should be evaluated based on their ability
to work as a group to achieve their assigned goals, which should contribute to
the group goal of designing a car. However, the safety researchers job is more
individualistic. The more individualistic the effort and the more that individual
talent can affect the outcome of the group, the greater the potential for individual,
rather than group, rewards.
PROBLEMS
9-67 This question is designed to get students to reflect on the idea that a MACS
reports the results of human action and decision making, and therefore motivates
behavior. If MACS designers do not understand basic elements of motivation,
then the MACS design will be faulty and incomplete.
A brief discussion of the scientific management school of motivation and the
human relations movement is important to set the stage for the human resources
approach. Students should focus their answers on (a) that most (but not all)
people desire to work, (b) that people are now working in complex informationfilled environments, and (c) that people desire to be creative and to solve
problems. If MACS designers focus on out-of-date assumptions about human
motivation and behavior, then the system will be designed inappropriately in
todays environment. In addition, the major role of control systems is to motivate
behavior congruent with the objectives of an organization. System designers
need to consider the behavioral implications and consequences of MACS.
9-68 The four major behavioral considerations in MACS design are (1) embedding the
organizations ethical code of conduct into MACS design, (2) using a mix of
short- and long-term qualitative and quantitative performance measures (or the
balanced scorecard approach), (3) empowering employees to be involved in
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decision making and MACS design, and (4) developing an appropriate incentive
system to reward performance.
(1)
The MACS design should incorporate the principles of an organizations

code of ethical conduct to guide and influence behavior and decision
making as people face ethical dilemmas on the job. Often managers are
subject to intense pressures from their job circumstances and from other
influential organizational members to suspend their ethical judgment in
certain situations. The ethical framework embedded in system design is
extremely important because it will influence the behavior of all users.
(2)
The ways in which organizations and individuals measure performance

sends signals to all employees and stakeholders about what the
organization considers its priorities. If organizations choose performance
measures without careful consideration, then behavior incongruent with
the organizations goals can occur. The Balanced Scorecard integrates an
appropriate mix of short- and long-term financial and non-financial
performance measures used across the organization, and helps
organizations grapple with their intangible or intellectual assets. The
Balanced Scorecard is a systematic approach to performance measurement
that translates an organizations strategy into clear objectives, measures,
and targets.
(3)
Empowering employees in MACS design requires two essential elements

allowing employees to participate in decision making and ensuring
employees understand the information they are using and generating.
Encouraging participation has a two-fold benefit for organizations. First,
research has suggested that employees who participate in decision making
evince greater feelings of morale and job satisfaction, as well as
commitment to the decision. In many instances, these heightened feelings
translate into increased productivity as employees begin to feel that they
have some ownership and control over what they do at work. Second, the
organization is able to gather information about improving jobs and
processes from the individuals who are closest to those jobs and
processes.
The second critical element of empowering employees is ensuring that
they understand the information they use and on which they are evaluated.
If employees at all levels understand the organizations performance
measures and the way they are computed, the employees can take actions
that lead to superior performance.
62
(4)
MACS design involves choosing the most appropriate reward systems to

motivate desired behavior. Although intrinsic rewards are sufficient to
motivate some people to choose behavior consistent with the
organizations goals, a system of extrinsic rewards often provides
additional motivation for desirable behavior.
9-69 Reasons individuals may feel justified in cheating at golf include the
following:
Its only a game.
My competitors are doing it.
Everyone does it.
It does not hurt anyone.
The ends justify the means.
They dont see anything wrong with it.
There is certainly concern that individuals who cheat at golf are also likely
to cheat in business, as stated by Jeff Harp in the In Practice materials on
cheating at golf. Also in the In Practice materials, behavioral economist
Dan Ariely expressed concern that cheating at golf reveals attitudes about
bending the rules in other arenas. He further expressed concern that
cheating at small things could lead to cheating at larger things and
become an accepted practice in business.
9-70 This question is based on a situation described in an article by Andrew W.
Singer, Can a Company Be Too Ethical? Across the Board (April 1993), 17
22 (copyright by The Conference Board). One option is to report nothing about
the packet and revise your bid lower than your competitors, with the expectation
that you will have spared jobs and provided a better return to shareholders.
Singer reports the companys alternative response: The CEO informed its
competitor and the U.S. Government about the packet, and let its original bid
stand. The competitor won the contract. The CEO believed he made the
appropriate decision (that is, not too ethical), despite the fulfilled predictions
of lost jobs and reduced profits. The CEO reasoned that his companys
reputation for ethical behavior would enhance the companys long-run prospects.
9-71 This type of situation is probably not uncommon. You can confront her again and
ask that she resubmit the report, and encourage her to discuss the companys
policies on flexible scheduling to accommodate the family responsibilities she
63
described. If she refuses then, you can tell her that for her sake and the good of
the organization, you will have to tell your boss. Chances are she will rectify the
report.
9-72 This is a thornier situation than that portrayed in some of the earlier questions. In
this situation there is a threat that you, the employee, will lose your job if you
dont comply. A possible course of action is to not comply and go to your
immediate superior, who in this case is the controller, and ask his/her advice.
The controller may be able to talk to the executive in an indirect manner and have
him back off. In this case the executive may disavow any knowledge of the
incident; however, this still leaves you at risk. Another alternative is to have your
superior go to other more senior management in the firm to describe the situation.
Because you and the executive were the only ones to have the conversation this
becomes a difficult situation. However, once senior management is alerted to the
problem they may be able to monitor the executive and begin a file of his
activities.
9-73 (a)
Preventive control: Preventive control is usually used in situations where

there is the possibility for the employees actions to deliberately or
accidentally cause damage, risk, or loss either to the employee or to the
organization. In preventive control, discretion in performing a task may be
minimized because of the precision required or the nature of the materials
involved. The examples chosen should indicate why preventive control is
appropriate and should clearly illustrate an approach where the
organization is designing the job to try to prevent some undesired
employee behavior.
(b)
Monitoring: Monitoring involves inspecting the work or observing the

behavior of employees while they are performing a task. Monitoring is
most useful in settings similar to those indicating preventive control. While
preventive control focuses on designing the job or the process to prevent
the undesired activity from happening, monitoring relies on random
observation to enforce the operating rules. Therefore, unlike the preventive
control situation, there is no attempt to design the job to avoid the
undesired behavior. The examples chosen should reflect an appropriate
setting for monitoring and should demonstrate an understanding of the
differences between preventive control and monitoring.
(c)
Results control: Results control is most useful in situations where

employees understand the organizations objectives and their contribution
to those objectives, and employees deliver a high component of skill,
64
knowledge, or commitment to their jobs. For results control to be

effective, the organization must clearly define its objectives, communicate
them to appropriate members, and design performance measures
consistent with the objectives. This method does not directly monitor or
control the tasks to be performed, often because it is difficult to measure
the components of what the employee delivers to the job. The
disadvantage of results control is that results can be affected by
circumstances beyond the employees control. Therefore, results control is
often conditioned by assessing performance relative to a standard that
reflects the circumstances the employee faced. The examples chosen
should reflect situations where the employee contributes skill, knowledge,
or motivation to the job that cannot be directly assessed.
9-74 The discussion should focus on examples showing that most employees in
complex work environments perform a variety of tasks. Clearly, not all
performance on all tasks is monitored, but as soon as one begins to consider that
more qualitative measures such as quality and customer satisfaction are
important, it becomes evident that a mix of measures is appropriate.
It may be useful to come up with examples from different work contexts. You
might consider how to measure the performance of people in the following jobs:
a used car salesperson
a nurse in a hospital
an auto mechanic
a university professor (this is pretty close to home, however!)
a fund raiser
an insurance underwriter
The discussion can then be focused to what happens at the workgroup level.
With teams or workgroups, performance evaluation becomes more difficult, but
there are qualitative variables such as group morale and satisfaction that should
also be assessed. Issues related to group output measures such as quality and
timeliness are also measurable.
Qualitative divisional measures are harder to determine, but again, the overall
quality and reputation of a product reflects on a division. Customer satisfaction
at this level can also be a sound qualitative measure.
65
9-75 The competitive characteristics are low price, conformance to specifications,

short cycle times, high quality, good service and on-time delivery. These
objectives are consistent with just-in-time manufacturing systems. Important
performance measures would include: cycle times (including the time taken to fill
a customer order from start to finish, and production time), first-pass yield
(proportion of good items to total items produced at the final inspection station),
number of production system failures, conformance to schedule, cost per unit,
customer satisfaction scores, number of customer complaints and material yield.
9-76 Both participation in decision making and education to understand information
received in organizations contribute to employee empowerment in MACS
design. The reason is that the MACS is the central information system in most
organizations. Like all information systems, its benefits are a direct function of
the quality of the information contained in it, and whether employees find it
useful for decision making. Asking for input about system design and the kinds
of information that should be generated from the system from those employees
who work with a MACS on a routine basis (and in some cases even for those
who only use the system on a limited basis) has several effects. First, the system
is updated with information that comes from employees who are closest to their
jobs and hence know what information they need. Second, through participation
employees will feel that they are having a direct effect on their work environment
and this could increase their motivation and morale. Third, the organization as a
whole benefits because it is able to obtain the most up-to-date information and at
the same time potentially increase motivation for its employees to perform. The
situation that organizations want to avoid is one in which uninformed people
design the information system without really understanding the information needs
of employees. When this occurs, employees believe that the system is useless
and begin to develop their own private information systems to get their work
done and gauge their performance. Clearly, if many employees are developing
their own systems, there is little coordination throughout the organization
regarding information, and a formal system is largely ineffective.
In order for a MACS to function well, employees must be constantly re-educated
as the system and its performance measures change. If employees understand the
organizations current performance measures and the way they are computed, the
employees can take actions, resulting in superior performance measurements that
lead to intrinsic and extrinsic rewards for employees, and achievement of the
organizations goals.
66
9-77 (a) This form of budgeting is called consultative.

(b) The pros of consultative budgeting are that the organization can gather
information from subordinate managers about their local operations. Local
managers have more insight and experience than those far from the operation.
Some organizations hope that allowing subordinates input in the budgeting
process will increase their motivation to achieve the budget. Other advantages
are that it is quicker than participative budgeting and participative budgeting
may be impractical.
On the con side, the superior has the final say on the level at which the budget
is set. In some situations, the final budget may be far from where the
subordinate manager thought it should be. In this case, employees morale and
commitment will decline. In the worst case, the superior has no intention of
using the subordinates input. This form of consultation is called pseudoparticipation and can have very negative effects on the subordinates morale
if he or she finds out the entire procedure was a charade.
9-78 In participative budgeting, budgets are set jointly between superior and
subordinate managers. This means that both parties negotiate the budget and
once both parties leave the negotiating table, what has been decided will stand.
Participative budgeting has many advantages, such as allowing superiors to
obtain the subordinate managers information about local conditions, and
increasing the subordinate managers commitment and motivation to achieve the
budget. In some very large firms with many managers and many budgets,
participation of this kind may be impractical given the time and energy involved
in meeting with each manager.
Setting budgets authoritatively is very efficient. Senior management can simply
determine by fiat what each subordinate managers budget will be. This may be
the most appropriate method if subordinate managers are not very
knowledgeable about the budgetary process or if the organization is simply trying
to save time and the resources involved with the other two types of budgetsetting methods. The disadvantage of setting budgets in an authoritarian manner
is that subordinate managers have very little ownership of the budget, since they
were not involved in any way with setting the budget. This lack of ownership
could lead to decreased motivation to achieve the budget. Further, managers
never really learn about the budgeting process and will always be left in the dark.
Finally, the organization misses out on the insight and information about local
operations that subordinate managers may have.
When budgets are set via consultation, the organization is attempting to gather
information from subordinate managers about their local operations. The idea is
that local managers have more insight and experience than those not close to the
67
operation. The organization is also hoping that allowing subordinates input will
increase their motivation to achieve the budget. The concern with consultation is
that the superior has the final say on the level at which the budget is set. In many
cases the final budget may not be close to where the subordinate manager
thought it should be. In the worst case, the superior has no intention of using the
subordinates input. This form of consultation is called pseudo participation and
can have very negative effects on the subordinates morale if he or she finds out
the entire procedure was a charade.
68
9-79 (a) The motivation of the sales group is to understate their sales estimates in
order to increase their expected sales commission.
(b) The organizations budgets will understate sales. If capacity is planned based
on understated sales, then capacity will be too low and the organization will
continuously be using overtime to meet demand.
(c) The need is to develop a scheme that eliminates the motivation of the sales
force to understate their sales expectations. The idea would be to decouple
the sales estimates and the sales targets. One approach would be to eliminate
the sales commissionhowever, this is likely not a choice that would be
considered seriously. Another possibility is to base sales estimates on
historical trends. The organization might undertake to link industry sales to
demographic or economic indicators in order to end the reliance on sales
force forecasts. Another approach would be to reward the sales person for
two things: (1) the accuracy of the estimate and (2) the level of sales.
9-80 Woody is engaging in the process of building slack into his budget. Many believe
that this is a rational thing for Woody to do to protect himself from any kinds
of uncertainties in the environment that he might face. For example, if his key
source of raw materials dries up and Woody has to find an alternative source
which, on short notice, will cost him three times his usual costs, extra money in
the budget will allow him to purchase the materials. Having those excess
resources may also allow him to achieve his production goals without exceeding
his budget. Of course, if everyone in Woodys organization pads his or her
budget, the organization will be run very inefficiently and ineffectively.
One way for the organization to reduce slack building is to modify the way that it
evaluates Woody and his fellow managers performance. If, in the past, harsh
penalties have been levied on those who did not achieve their budgets, then slack
building behavior will be encouraged. Instead, the organization may determine
performance schemes that reduce the pressure to meet the budget, by providing a
5% or 10% confidence interval around the actual level of the budget. If a
manager falls in this range, then he or she is not penalized. Or, a system can be
set up that is based on multi-year performance in which a manager is not
evaluated just on one year, but over several years. Thus, if a manager does not
meet the budget in one year, but does well in the others, he or she is not
penalized. Either of these approaches may reduce the amount of slack that
Woody would be inclined to build into his budget.
69
9-81 Tying pay to performance has taken hold of U.S. business. Some believe that
paying a good, fair salary should be motivating enough, and that using pay-forperformance sends the wrong signal to employees. That is, such incentive
schemes signal that employees will only do their best work if they get a bonus.
Others believe that it is psychologically more motivating to link pay to
performance. Some organizations that use pay-for-performance compensation
pay employees a lower flat wage than other non-pay-for-performance firms and
then add a bonus that brings up the total compensation package to be
approximately equal to the non-pay-for-performance firm.
A possible disadvantage of tying pay to performance is that employees may focus
only on the item(s) used to determine the bonus, leading to dysfunctional
behavior as employees lose sight of what is best for the organization.
Furthermore, employees may give little attention to qualitative factors and they
may focus only on short-term goals.
9-82
Organization
Unit
Symphony orchestra
Government welfare
office
Airline
complaint desk
Control room in a
nuclear-generating
facility
Basketball
team
What Behavior Should

What Is an Appropriate
Be Rewarded?
Incentive System?
Number of tickets sold,
Market wage plus profit-share
Group-oriented performance
Number of cases processed, Market wage plus
Success in helping clients
performance-related bonus
Customer
Market wage plus
satisfaction
performance-related bonus
Operating equipment
Market wage
as required
Individual performance
for some players plus
team success
Wage plus performancerelated bonus
9-83 This is a practical question designed to put the student in a situation of managing
a business where employees cannot be supervised directly and have a strong
impact on repeat sales. The dilemma is that the jobs are relatively low skilled
(although the job is manual and quickly learned, there are important skills
relating to dealing with customers) and the economics of the competition do not
allow this organization to use higher wages to attract and keep motivated
employees.
Most responses will suggest some type of profit sharing system where the
employees are paid a market wage to attract them to the organization and then a
profit share to motivate them to do their work conscientiously and to develop
70
their people skills. Note that it is the customer, not the company, that absorbs the
unfavorable labor efficiency variance under the current pricing scheme since the
customer pays for hours worked. This may have an unfavorable effect on the
organization by causing higher prices and losing customers.
The company might consider moving to a charge that is based on work done
rather than time worked. This would provide the opportunity of shielding the
customer from unfavorable labor efficiency variances and allow the use of a gain
sharing type of plan that pays workers bonuses based on their ability to beat time
targets for the individual jobs. However, if this approach was used it would be
critical to use customer satisfaction surveys to ensure that quality is not being
sacrificed to beat the time targets. The company might offer a bonus after a given
number of days of employment to increase the retention of good employees. The
company might also offer a bonus for very satisfied customers identified through
surveys.
9-84 (a)
This is a deep issue that plagues all research and development activities in
profit seeking organizations. The question is how to draw the line between
letting people do research that is so basic that it may never result in
profitable patents but, if it does, may represent a profound competitive
advantage, and other research that is totally oriented to developing
profitable products. The key is that the organization must develop a policy
which states that no more than a certain proportion of the research and
development activity can be devoted to basic research (that is research
that is not devoted to developing any product in particular but may pay off
in some unspecified way). The key is to debate and establish that
proportion.
There does appear to be a problem at the moment. If we define research
and development productivity as the rate of new product introduction
divided by the expenditures on research and development, this
organization is not doing well. In the long-term, competitive pressures will
not allow this organization to continue in this way.
(b)
The focus will be on identifying market opportunities and directing the

attention of the research staff toward meeting these opportunities. A share
of the income provided by a new product could be paid to people who
develop that product. The compensation plan needs to be changed.
Currently, scientists are rewarded based on their level of education and the
number of research papers published in scientific journals. The number of
research papers published should be dropped as a performance metric.
Compensation should be tied to the number of new prototypes developed,
71
the number of new products developed, or the number of patentable

inventions.
9-85 (a)
Some obvious positive points: this plan is very specific, it focuses on

profit performance, it rewards group performance, and it can be adjusted
for good or bad conditions that the organization members cannot control.
(b)
Some obvious concerns: profit performance is a short-run performance

measure and there is no discussion of how the pool proceeds are
distributed to individual employees. Like all group incentives, this plan
suffers from the problem of people who do not do a good job pulling down
those that do. The upper limit will encourage people to pull back their
effort if they believe the organization performance is approaching the
upper limit. Also, employees may have somewhat limited ability to control
earnings from operations if external economic factors play a large role in
earnings.
(c)
4% + 3%
332 320
390 320
= 4.51428%
Profit-sharing pool = 4.51428% $332,000,000 = $14,987,410 (rounded)

(d)
9-86 (a)
Tightening standards every period reduces the motivational effects of this

system. This is because process improvements provide benefits for fewer
periods than if standards remain the same. Perhaps the plan should only
tighten the standards every 3 years.
Profit sharing pool
lower of [45,000,000 (100,000,000 18%)] 40% or 7,000,000 =
lower of (45,000,000 18,000,000) 40% or 7,000,000 =
lower of 27,000,000 40% or 7,000,000 =
lower of 10,800,000 or 7,000,000
Profit sharing pool $7,000,000
(b)
68,000
25,000,000
Marg Watsons bonus 7,000,000 0.00272
Marg Watsons bonus $19,040
Marg Watsons bonus 7,000,000
72
(c)
This profit sharing plan is specific and has justifiable economic properties.
The target profit level probably is intended to provide the required return
to shareholders and is desirable.
(d)
The plan pays nothing unless a certain level is achieved. This may be
unfair when times are bad. That is, with severely depressed economic
conditions, the employees may do a good job and earn no bonuses. It is
not good enough to say that if the owners do not do well the employees
should not do well. It is not the role of employees to bear this type of risk.
Their job is to do the best they can under the conditions that they find.
This is an undesirable feature of all profit-sharing plans.
The choice of 18% should reflect the return available to shareholders for
comparable investmentsthe shareholders required rate of return. The
required rate of return is likely to be lower; therefore the 18% is too high
and should be adjusted downward.
Basing the profit share on salary rather than performance assumes that the
employees contribution is proportional to salary. While this makes the
plan easy to administer, it does not tie the reward to the performance level.
A more appropriate approach would set performance targets for the
individual and base the individuals share of the total bonus pool on
achievement of the performance targets.
The upper limit of $7,000,000 is desirable from the perspective of the
shareholders but dampens motivation from the perspective of the
employees. That is, when performance reaches the level where the bonus
pool is $7,000,000 the employees may slack off.
The 40% profit share seems a bit low. Some plans are as high as 50%. It is
difficult to say but the lower proportion may dampen the motivational
effect of the plan. Furthermore, the individuals considered may have
limited ability to control earnings.
9-87 (a)
Target hours
= (0.2 200,000) + (0.15 220,000) + (0.25 130,000) +
(0.1 240,000) = 129,500 hours
Savings (target hours actual hours) wage rate
Savings = (129,500 110,000) $16 = $312,000
Gain share = $312,000 50% = $156,000
73
(b)
It is clear and it is based on something that the employees can control

directly. A gain share of 50% of the savings seems reasonable.
(c)
It is not clear whether this amount is substantial enough to have any

motivational effect on the employees. If the bonus is shared equally among
the workers, the bonus amounts to about 8.9% ($156,000 [110,000
$16]) of wages paid. The employees may or may not find this a strong
motivator.
9-88 (a)
The Scanlon plan base ratio would be determined as follows

payroll costs
3,000,000
Base ratio
0.06
value of production 50,000,000
The quarterly amounts accumulated in the plan are shown in the following
table.
Quarter
1
Ratio
Plan Change
Cumulative
2,475,000
0.055 45,000,000 (0.060 0.055) = $225,000 $225,000
45,000,000
3,480,000
0.058 60,000,000 (0.060 0.058) = $120,000 $345,000
60,000,000
3,575,000
0.065 55,000,000 (0.060 0.065) =

($275,000)
55,000,000
2,832,000
48,000,000
0.059 48,000,000 (0.060 0.059) = $48,000
$70,000
$118,000
Therefore the amount available to be distributed to the employees at the

end of the year would be 35% of $118,000 or $41,300.
(b)
The Scanlon plan assumes that the payroll costs are highly variable. This
was likely true in the 1930s when the plan was originally proposed.
However, in todays conditions many labor costs are essentially fixed and
may be very difficult to change in response to short-term fluctuations in
demand. The plan also assumes labor costs decrease over time if labor
efficiency increases, which may not be true in a highly unionized setting.
The plan also assumes that declines in labor costs are due to labor
efficiencies, which may not be true. The company may be experiencing
layoffs or production downturns.
74
(c)
The Scanlon plan assumes employee participation and group effort.

Therefore, a reasonable proposal is to divide the distribution equally
among the employees covered by the plan. An alternative in a small group,
where all the employees know each other, would be to have the employees
vote on the distribution in a private ballot by ranking each members
contribution.
(d)
Under this approach, the base ratio for the following year would be 0.055,
the ratio experienced in quarter 1. This is called the ratchet effect. Its
result is to quickly tax away any innovations that the employees develop
so that they experience no long-term benefit from their innovations. This
quickly dampens enthusiasm for, and the motivational effect of, the plan.
To avoid this, the base ratio should hold over a longer period of time,
perhaps three years, unless there is a system change, such as new
equipment, that creates a new standard for the base ratio.
9-89 (a)
Speeding up production was supposed to increase productivity and lower

coststhereby making the company more cost competitive. Speeding up
production also allowed workers to meet shipping schedules.
(b)
Middle managers sacrificed quality for conformance to the directive to

speed things up. Many motorcycles were shipped with known defects that
the production people expected the dealers to repair.
(c)
The result was that the quality of the motorcycles declined and customers
began to move away from this company.
(d)
The system was modified by instructing the employees that the

organization was committed to quality and that no motorcycle was to be
shipped with any known defect. Front-line employees were given the
authority to stop the production line whenever they saw a quality problem.
This got the message to all employees and customers that HarleyDavidson had changed; both quality and efficiency were now important.
9-90 Denver Jacks approach does not allow for participation on the part of
employees. Thus, he is losing many good ideas and probably stifling the
motivation of his employees. Further, Denver Jack is not getting the employee
buy-in from which he would benefit. On the other hand, some believe that a topdown approach to decision making is efficient and does not tie up scarce human
resources. Each kind of organization must decide what approach or combination
of approaches is the most appropriate for its purposes.
75
9-91 This incentive compensation plan seems to meet the most important
characteristics of effective incentive compensation plans. It clearly distinguishes
between wages and incentive compensation and does not attempt to replace
wages with incentive compensation.
The plan is precise in terms of what it rewards on the two elements of
performanceshorter-term performance measures that are subject to cash
bonuses (presumably these performance measures would relate to the
organizations key success factors) and longer-term measures of performance
determined by share prices.
The stock price component of the plan has a time frame that is long enough to
promote a longer-term decision-making perspective, but short enough to support
the reinforcement effect of rewards. In order to distinguish between market and
executive effects on share prices, the longer-term plan could be adjusted to
eliminate market-wide effects by basing rewards on performance relative to a
peer group.
A key characteristic of the plan is that it relies heavily on decisions made by
independent outsiders. This improves the ethics associated with the
administration and operation of this plan.
9-92 (a)
This change is inconsistent with the idea that compensation should have a
fixed and a variable component and that the fixed component should
reflect the market opportunity.
(b)
The employees would likely complain about the risk imposed on them by
the new system. The employees would also now be unwilling to undertake
any activities that do not relate directly to earning a commission.
(c)
Given the approach of all compensation being commission based taken, an

argument can be made that it is reasonable to set the commission so that
the wage bill would have been the same under the previous and new
systems. This approach seems to leave the workers equally well off under
the two systems. However, economic theory supports a position that riskaverse workers must be compensated for bearing more risk under the new
system if they are to be equally well off in expected utility. Thus, a
different and better approach might to maintain a wage and to provide
motivation through a much lower rate of commission than the new system
uses.
76
(d)
The top employees will likely stay since their income will increase. The
weaker sales people will likely leave to find jobs where the income is not
so risky. In general, this system will tend to attract high-pressure sales
people who are sales-oriented and who will be unwilling to do anything
not directly related to earning commissions. The company will have to
decide if this is what it wants. The system rewards only one aspect of
employees behavior, which could be detrimental to the company. In
addition, employees may resort to data falsification and gaming in order to
increase their income.
9-93 (a)
This incentive scheme, which is traditional in government, is

inappropriate. It promotes building up staff without regard to the true need
for staff dictated by legislative initiatives and legitimate client needs. It
also promotes inefficiency among her subordinates; the longer they work
(perhaps due to inefficiencies), the more she gets paid.
(b)
The performance measurement scheme should reward the ability to

achieve outcome targets defined by client requirements that the
government is committed to meeting. Labor efficiency measures should be
put in place. Examples include number of claims processed by each
employee per day, client wait time for in-office visits, and number of
claims denied by each employee per day. Possible qualitative measures
include client satisfaction and number of client complaints per day.
9-94 (a)
Based on salaryeasy to administer, likely to be considered fair and, to

the extent that salary reflects the relative ability to contribute to results, is
based on contribution; based on equal shareeasy to administer, likely
to be considered fair and reflects how people often divide up rewards
when left to their own devices; based on positionsame as based on
salary; based on individual performanceties reward most closely to
performance and likely to have the highest motivational impact.
(b)
Based on salarymay convince lower level employees that they have

little to contribute, does not necessarily reflect contributions; based on
equal sharemay have little motivational effect, may lead to feelings of
inequity if some people contribute nothing; based on positionsame as
based on salary; based on individual performancemay be difficult and
costly to administer, may lead to arguments about interpreting the
performance measure.
(c)
The choice should be reasoned. The response should identify the objective
of compensation (to support the achievement of organization goals) and
the individuals understanding of how rewards motivate people. Any
77
response is acceptable as long as it clearly reflects that the goal is to

promote achievement of organization performance and that the reward
design must reflect the belief of how rewards motivate individual behavior.
CASES
9-95 Anne Wu should proceed carefully.
(a)
Anne Wu should approach this issue with Judy Choy by stressing that the
fast pace of work that is currently underway is contributing to the 10%
error rate. As errors increase, the cost of correcting them increases. There
are probably other reasons for the 10% error rate and these reasons need
to be investigated before a faster pace of work is demanded.
(b)
The organization seems to be stressing quantitative information (volume of

claims processed) and not really focusing on quality (error-free work) and
customer satisfactionboth extremely important qualitative factors.
(c)
The organization should use a mixture of quantitative and qualitative

measures. Output per claims examiner is an important indicator, but so is
the error rate per examiner. The organization should also assess the
number of refiled claims per examiner as a way to help build quality into
the examiners work.
9-96 This response describes what is reported about Sherron Watkinss experiences at
Enron. Numbers in square brackets refer to the references listed at the end of the
responses for this case.
(a)
Watkins discovered problems in the summer of 2001, while working on an

assignment for Andrew Fastow, who was then Enrons chief financial
officer. Watkins was tasked with estimating the economic effect of
potential sales of some of Enrons assets. In conjunction with this task,
Watkins evaluated each assets estimated book value and market value.
She stated the following [2]:
A number of assets were hedged with an entity called Raptor.
Any asset that was hedged should, for the most part, have a
locked-in sales value for Enron, meaning that despite current
market prices, Enron should realize the hedged price of the
Raptor.
It was my understanding that the Raptor special-purpose
entities were owned by LJM, a partnership run by Mr.
78
Fastow. In completing my work, certain Enron business units

provided me with analyses that showed certain of the hedged
losses that had been incurred by Raptor were actually coming
back to Enron. the Raptor hedge had declined in value
such that Raptor would have a shortfall and would be unable
to fully cover the hedge price that it owed Enron.
I was highly alarmed by the information I was receiving. My
understanding as an accountant is that a company could never
use its own stock to generate a gain or avoid a loss on its
income statement. I continued to ask questions and seek
answers, primarily from former co-workers in the global
finance group or in the business units that had hedged assets
with Raptor. I never heard reassuring explanations.
Watkinss response is summarized in [4].
According to [5], Coopers trail of discovery began when an executive
told her that corporate accounting had taken $400 million out of his
reserve account and used it to boost WorldComs income. Despite
reassurances from audit firm Arthur Andersen and CFO Scott Sullivan, as
well as hostility from Sullivan, Cooper led her internal audit team to
eventually discover that the firm had capitalized billions of dollars of
expenditures that should have been expensed.
(b)
Watkins appears to have considered or attempted to implement options 1 or

4. Option 1 is to point out the discrepancy to a superior and refuse to act
unethically, understanding that this may lead to dismissal. When Watkins
became aware of the accounting problems at Enron, she did not want to
challenge Fastow or then-CEO Jeffrey Skilling about the problems until
she had another job lined up, because it would have been a jobterminating move [2]. She interviewed for a position at Reliant Energy
and planned to sign a new job contract and confront Skilling on her last
day at Enron [4]. When Skilling suddenly resigned on August 14, 2001,
the new CEO, Kenneth Lay, invited all employees to submit questions for
an August 16 meeting at which Lay would talk about Skillings
resignation. Watkins submitted to Lay an anonymous letter with the
statement, I am incredibly nervous that we will implode in a wave of
accounting scandals [4]. On August 16, Watkins discussed her memo
with Cindy Olson, then vice president for human resources. Upon Olsons
advice Watkins arranged to meet with Lay personally, on August 22.
Watkins prepared a memo detailing her concerns. She included the
79
following quote from a manager-level employee: I wish we would get

caught. We are such a crooked company [2, 6 (p. 367)]. Watkins hoped
that after the first memo, the company would act on her suggestions,
come clean, and avert disaster [6, p. 321]. After Watkins met with Lay, he
promised follow up on Watkinss concerns. Watkins asked to be
transferred from Fastows group. Thus, after Skillings resignation,
Watkins appears to have been following option 4: Work with respected
leaders in the organization to change the discrepancy between practiced
and stated ethics.
Watkinss memos became public because her memos were part of the
many, many documents subpoenaed by the House Committee on Energy
and Commerce. Watkins and her memos became national news [6, pp.
345-347]. Reference [3] states that a congressional subcommittee
investigating Enrons collapse released Watkins letter to chairman
Kenneth Lay warning him that the companys methods of accounting
were improper.
Cooper also attempted to implement options 1 and 4. She approached the
companys audit firm, Arthur Andersen, and CFO Scott Sullivan about the
troublesome accounting issue. Reference [5] reports that Cooper received
assurances from Arthur Andersen; she was so concerned about Sullivans
angry response that she felt her job was at risk. After weeks of
investigation, Cooper s team confirmed that the firm had capitalized
billions of dollars of expenditures that should have been expensed. At
Sullivans request, Cooper explained what her team had found. Cooper
then conveyed her findings to the head of the audit committee, and to the
companys controller, David Myers.
(c)
As stated in part (b), Watkins certainly felt pressured not to challenge

Fastow and Skilling, regardless of the issue. Her information raised
serious concerns about extremely serious accounting improprieties, and
conflicts of interest for Fastow. If Watkins dropped her concerns, Enrons
executives and employees would benefit in the short term until it became
impossible to hide the wrongdoings.
Similarly, Cooper felt great pressure not to challenge CFO Sullivan. Her
information raised serious concerns about accounting improprieties that
the CFO and the companys controller were aware of. And, similar to
Watkinss situation, many felt that if Cooper dropped her concerns,
WorldComs executives and employees in Enron would benefit in the short
80
term, and some felt that the company might eventually turn itself around
financially.
(d)
Enrons 2000 on-line annual report lists four key values: communication,
respect, integrity, and excellence [7]. Enron distributed illustrated booklets
listing these four values [6, p. 103], and Skilling and Lay narrated a video
discussing the four values. The video was given to all employees [6, p.
104]. Nevertheless, top management did not consistently demonstrate the
stated values. When Watkins, Cooper, and Rowley were asked why others
did not do what these three did, they agreed that it was the value system
at the top [1]. For example, Lay demonstrated lack of ethical leadership
by insisting that Enron employees use his sisters travel agency [6, p. 36].
A job satisfaction survey at Enron in the mid-1990s revealed that many
people felt uneasy about expressing their opinions at Enron. Lay and
Skilling promised corrective action. Consistent with this, the company
distributed stick-note pads with this quote from Martin Luther King, Jr.:
Our lives begin to end the day we become silent about things that matter
[4]. In contrast to managements official position encouraging people to
speak up about important matters, Watkins discovered that very shortly
after she met with Lay to discuss her concerns, Enrons lawyers provided
information to management about legal issues related to firing
whistleblowers [4]. Watkins discovered this in February 2002. She
commented, Theres nothing in there to remind them to remember the
code of conduct, the vision and values [4].
According to [8], WorldCom CEO Bernie Ebbers and CFO Scott Sullivan
were celebrated leaders Sullivan had a reputation of impeccable
integrity. Their reputations apparently provided reassurance to most
employees when Ebbers and Sullivan made it clear that employees should
not question WorldCom practices. Also according to [8], loyalty by
employees and the Board of Directors was well compensated, so that
neither group had incentives to confront the leaders on questionable
practices.
(e)
The Time interviewers described the three persons of the year as follows
[3]:
none of them are rebels in the usual sense. The truest of true
believers is more like it, ever faithful to the idea that where they
worked was a place that served the wider world in some
important way.
81
Cooper explicitly mentioned values and ethics that you learn through
your life [1] and Rowley and Watkins appear to agree. In other interview
statements, Watkins refers to Johnson & Johnson doing the right thing in
response to the Tylenol scare [1]. After her meeting with Lay to discuss
the problems she had uncovered, Watkins felt that she had done the
hardest thing in my life, but I had carried the torch and dropped it off [4].
Reference [4] describes Watkins as independent and known for openly
stating her opinions and being able to support them.
(f)
As mentioned in (d), Watkins discovered that very shortly after she met
with Lay to discuss her concerns, Enrons lawyers explored the
ramifications of firing her in relation to whistle blowing [4]. Her hard drive
was seized, she was forced to move from her executive suite to a plain
office, and given work of little substance [4]. She feared for her safety [4].
At WorldCom, employees were expected not to question the companys
practices (see part (d)), and Cooper personally felt Sullivans hostility (see
part (a)). Cooper suffered great stress. Following the resulting shakeup at
WorldCom, Cooper suffered ostracism from some employees and no
senior executive at WorldCom thanked her for uncovering the accounting
impropriety [8].
(g)
This question is designed to challenge students to think about and discuss

how they will make ethical decisions, especially in the face of severe
personal consequences. In addition, students may propose other courses of
action that Watkins could have taken. For example, some former Enron
employees think Watkins should have informed the Securities and
Exchange Commission [4]. Watkins said that in retrospect, she would have
gone to the board [1].
[1]
Anonymous. The Interview,

http://www.time.com/time/personoftheyear/2002/poyqa.html, posted
December 22, 2002; 4:31 A.M. EST. Print version: New York:Time.
December 30, 2002-January 6, 2003, Vol. 160, Iss. 27; p. 58.
[2]
Anonymous. Enrons Many Strands; Lone Voice: Excerpts from the

Testimony of Executive Who Challenged Enron, The New York Times
(February 15, 2002), Late EditionFinal, Section C, Page 7, Column
1, Business/Financial Desk.
82
[3]
Lacayo, R. and A. Ripley. Persons of the Year, New York: Time.

December 30, 2002January 6, 2003, Vol. 160, Iss. 27; p. 32.
[4]
Morse, J. and A. Bower. The Party Crasher,

http://www.time.com/time/magazine/article/0,9171,1003992,00.htm
l, accessed February 5, 2011. Formerly at
http://www.time.com/time/personoftheyear/2002/poywatkins.html,
posted December 22, 2002; 4:31 A.M. EST. Print version: New
York: Time. December 30, 2002-January 6, 2003, Vol. 160, Iss. 27;
p. 53.
[5]
Ripley, A. The Night Detective,

http://www.time.com/time/magazine/article/0,9171,1003990,00.htm
l, accessed February 5, 2011. Formerly at
http://www.time.com/time/personoftheyear/2002/poycooper.html,
posted December 22, 2002; 4:31 A.M. EST. Print version: New
York: Time. December 30, 2002-January 6, 2003, Vol. 160, Iss. 27.
[6]
Swartz, M. and S. Watkins. Power Failure: The Inside Story of the

Collapse of ENRON. New York:Doubleday, 2003.
[7]
http://www.enron.com/corp/investors/annuals/2000/ourvalues.html,
viewed February 15, 2003.
[8]
Zekany, K., L. Braun, and Z. Warder. 2004. Behind Closed Doors

at WorldCom, Issues in Accounting Education, 19, 101-117.
9-97 See the solutions for Case 2-48.

9-98 Citibank Performance Evaluation, Harvard Business School Case (HBS Case No.
9-198-048, teaching note No. 1).
In the solutions here, notes are first provided for the textbook case questions,
followed by the published HBS teaching note.
Textbook case questions:
1
Copyright 1999 by the President and Fellows of Harvard College. Harvard Business School. This
note was prepared by Professor Robert Simons and Professor Antonio Dvila at IESE for the sole
purpose of aiding classroom instructors in the use of Citibank: Performance Evaluation, HBS No.
198-048. It provides analysis and questions that are intended to present alternative approaches to
deepening students comprehension of business issues and energizing classroom discussion. Reprinted
by permission of Harvard Business School.
83
(a) Why has Citibank introduced its Performance Scorecard? What benefits
does Citibank expect the Performance Scorecard to provide?
As stated at the end of the first paragraph in the case, last year, the
California Division of Citibank had introduced a new performance
scorecard to highlight the importance of a diverse set of measures in
achieving the strategic goals of the division. Also see the first three
paragraphs of the section titled New Performance Scorecard.
(b) What cause-and-effect linkages are implied in the Performance Scorecard?
See TN-4 and the related teaching note discussion.
(c) What characteristics are desirable for measures used to evaluate and
reward performance? Discuss the Performance Scorecards measures in
relation to the characteristics you identified.
See TN-5 and the related teaching note discussion of characteristics such
as alignment with strategy, measurability, objectivity, completeness, and
linkage to value.
(d) Assume that you are Lisa Johnson. Complete Exhibit 1 to evaluate
Jamess performance and explain your rationale for your rating on each of
the six dimensions and the overall evaluation.
See the teaching note discussion, beginning with the section titled
Performance evaluation.
Harvard Business School Teaching Note
Teaching Objectives
This case presents the costs and benefits of using multiple performance measures
to evaluate performance. The issues presented in the case include:
Introducing a performance scorecard as a diagnostic system to implement
intended strategy.
Evaluating the pros and cons of using a performance scorecard to evaluate
and reward performance.
Identifying the characteristics of a good measure.
84
Discussing the benefits and costs of using a subjective performance

evaluation.
Case Synopsis
The top management team of Citibank California is meeting to review the
performance of the banks branch managers and decide their bonuses. James
McGaran is next in the review process. The committee and students must decide
whether to give him an above par rating (with a bonus of 30% of his salary), a
par rating (with a 15% bonus) or a below par rating (with no bonus).
James McGaran is the manager of the most important and toughest branch in the
Los Angeles area. His financial performance has been impressive since he took
charge of the branch in 1992. In 1996, his financial performance was, again,
outstanding, well above the targets defined by top management. But in 1996
Citibank introduced a performance scorecard including financial as well as nonfinancial measures. Customer satisfaction was among the non-financial measures
used as leading indicators of future financial performance. Unfortunately, James
branch scored below par in customer satisfaction and, according to established
policies, he should receive, at most, an overall par rating.
However, Lisa Johnson, his supervisor, is not convinced that a par rating
would fairly reward James effort. Some of the services measured in customer
satisfaction are not under James control including phone banking and ATM
services. Moreover, James would perceive a par rating as unfair because of the
difficulty in managing his branch, the excellent financials, and the limitations that
he perceived in the customer satisfaction measure. On the other hand, this
decision will be closely watched by the rest of the division as a test of the new
performance evaluation system.
Assignment Questions
1. Why has Citibank introduced a Performance Scorecard?
2. Assume that you are Lisa Johnson. Complete Exhibit 9-2 to evaluate James
performance.
Case Theory and Background
For background reading that describes the concepts and theory illustrated in this
case, see Robert Simons, Performance Measurement & Control Systems for
Implementing Strategy, Prentice Hall (2000), Chapters 9 and 10.
The case can be used to address several theoretical issues. James performance
in terms of customer satisfaction is a good setting to discuss the characteristics of
85
a measure. The discussion naturally evolves around the issues of controllability

and information content of a measure, reliability of a measure, and the
advantages and limitations of objective and subjective measures.
Citibanks performance scorecard provides an excellent setting to evaluate the
advantages and disadvantages of using financial as well as non-financial
measures to communicate strategy and evaluate performance. The implicit
assumption when using non-financial indicators is the existence of a business
model that relates these non-financial measures to value creation. Through the
discussion, students can be asked to visualize the model used by top managers at
Citibank and assess its adequacy to implement the intended strategy.
Finally, the case presents a rich setting to explore issues around performance
evaluation and economic incentives. The evaluation process at Citibank includes
a target setting process, the use of financial, non-financial, subjective, and
objective measures, and objective and subjective performance evaluation criteria.
Each of these issues are useful to present concepts related to profit planning and
budgeting, measurement theory, performance evaluation, and design of economic
incentive systems.
Pedagogy
This case illustrates the tensions that emerge when the performance measurement
system is expanded to include measures beyond financial results. Non-financial
measures communicate the organizations strategy but, at the same time, remove
autonomy from the people in contact with the customer who have to work with
the additional constraints imposed by the new non-financial goals.
Strategy and structure
Before discussing James performance, it is a good idea to describe the strategy
and structure of Citibank California to have the important actors and their
objectives in the blackboard.
Citibanks strategy can be described as: build a profitable franchise by
providing relationship banking combined with a high level of service to its
customers. Whereby high level of service, management means:
*0
*1
Careful personal attention and
A broad selection of financial products.

Exhibit TN-1 presents the relevant organizational structure.
86
Performance evaluation
After this brief introduction, the discussion can shift to evaluation of James
performance where the tension of the case resides. In particular, students have
strong opinions on how Citibank measures customer satisfaction.
The discussion can start with the following question: How would you have
rated James performance before the Performance Scorecard was used?
Undoubtedly, his financials are impressive and it is very likely that he would
have gotten an above par rating which includes a 30% bonus and the prestige
associated with recognizing his accomplishments in the toughest branch of the
California region.
Next, the instructor can ask, How do you rate James performance in each of
the five perspectives of Citibanks performance scorecard?
In answering this question, the instructor should leave customer satisfaction until
the other five perspectives have been discussed. Most students will agree that he
deserves an above par rating in all of the perspectives (except for customer
satisfaction) because he performed above target. James impressive performance
can be emphasized by taking a close look at the financial perspective where
targets had been increasing throughout the period and James over-performed
every time. As a summary of James performance we can say:
In the financial perspective he was impressive: 16% over budget [for revenue] in
addition to a target that kept on moving up over time.
In strategy implementation he was above par in all quarters but one (the first
one). This is the only other perspective where some students may argue that the
performance was not that good. Usually, these students have decided to give
James a par rating and are looking for additional arguments to reinforce their
decision. But, the rest of the class will tend to dismiss this assessment.
In control he has been rated above par in all rated quarters.
In people, where Lisa has discretion to judge performance, James received an
above par in every single quarter.
Same for standards, were Lisa again showed her appreciation for James work.
While students discuss the various measures and dimensions of the performance
scorecard, it is helpful to build Exhibit TN-2 on one of the blackboards and ask
about the nature of each measure: is this an objective or a subjective measure?
While standards and people are subjective measures, control and customer
87
satisfaction are less so, and strategy implementation and financial are the most
objective (if we accept the objectivity of accounting).
Certainly, leaving aside customer satisfaction, James would have gotten an above
par rating and full bonus as he did in previous years. But:
How did James perform in terms of customer satisfaction? (see Exhibit TN3).
His quarterly scores (66, 63, 54, and 72) are below the targets defined for this
performance dimension and, therefore, he should receive a below par rating.
But not all students agree on the adequacy of this performance measure. The
following table illustrates some of the points that students may bring to the
discussion.
In favor of a Below Par rating
In favor of a Par rating
*0
Emphasizes Citibank
strategy.
*1
He
became
branch
manager in 1992 and he is still
producing good results => the
measure may not be a leading
indicator.
*2
Customer satisfaction
is a leading indicator of
performance and represents the
business model. A bad rating
will be reflected in financials
sooner or later.
*3
The measure is not good
because only 25 customers per
quarter does not represent the
population. In addition, there is a
selection bias because only
customers that visited the branch
were eligible for the interview.
*4
It focuses his attention
and that of the rest of the
division on the importance of
customer satisfaction to fulfill
the intended strategy.
*5
James segment is more
demanding and therefore he should
get a lower rating.
*6
Customers answering the
survey are also judging services
not controlled by James.
*7
Too much emphasis on
customer satisfaction may force a
wrong asset allocation by James.
88
He may overinvest in customer

satisfaction.
The main arguments against customer satisfaction are:
It does not necessarily reflect strategy (i.e., it is not a leading indicator). Few
students will notice this underlying assumption. We will come back to this
issue later in the discussion.
The measure is unreliable because using 25 customers per quarter does not have
enough precision or because people answering the survey are a biased
sample. It is very unlikely (in terms of probabilities) that he got four bad
ratings because of bad luck. However, there is merit in the comment that
customers who visit the branch may not be representative of the full customer
population especially to the extent that high net worth customers prefer to
use banking services by telephone, ATM, or even have banks visit them in
their offices or homes.
Related to the previous argument, some students may argue that the
questionnaire is badly designed. Usually, if questioned, the student means that
the measure includes things that James cannot control as described in the
following point. But some students may argue that the questionnaire is wrong
and then the argument focuses on the reputation and reliability of a
professional marketing research firm.
The measure includes things that are not controllable by James like ATM and
phone banking. Students feel very strongly about this issue as they see it
unfair. However, every branch gets the same ATM and phone banking service
and it is likely that some offices are above par in customer satisfaction.
Blaming ATM and telephone banking is also a handy excuse for James. An
additional reason to dismiss this argument is that any measure includes
uncontrollables if it is to be complete. Moreover, James can manage the
expectations of his customers regarding ATM and phone banking, therefore
having certain control upon these uncontrollables. A useful example is to
ask students what performance measure they would choose for a CEO: share
price or profits. The discussion will illustrate the tension between the
controllability principle and the importance of including the results of all
types of actions (informativity principle). If students still feel strongly, the
instructor can propose (as it was the case) that the customer satisfaction
measure included mostly branch-related questions.
Finally, the standard for James should be different because his customers are
more demanding.
89
The conclusion of the above discussion is that customer satisfaction may not be a
perfect measure but this argument is valid for any measure that we can think of
because the perfect measure does not exist. It is always possible to find a
limitation in any measure and we have to work with the tools that are available.
It is not possible to ignore a particular measure because we dont like what it
says.
Target setting
The last criticism on customer satisfaction (point 5 above) rises the interesting
point of target setting: if James branch is the toughest in the division, maybe a
better target setting process would take care of the problems with the customer
satisfaction measure.
How are targets decided?
The process begins when Frits Seegers and area managers negotiate targets for
the division as a whole and for each area in particular. Control and customer
satisfaction are common to all areas and branches, while financial and strategy
implementation goals are specific to each branch. Next, each area manager
establishes the financial and strategy implementation goals for each branch
making sure that they add up to the area targets.
Some students may argue: the customer satisfaction target is common to
everybody and it should not be so. Others will counter: Why should James get
a lower customer satisfaction target? Every branch manager could give an
argument for the uniqueness of his branch and why he should get a lower target.
Therefore, it seems that changing targets is not a good idea.
The Design of the Performance Scorecard
The primary purpose of a performance scorecard is to communicate a particular
strategy down the organization and establish a basis for evaluation based on this
strategy.
Therefore, defining a specific performance scorecard and linking rewards to the
accomplishment of the specified measures (diagnostic system) is appropriate
when top managers are aware and clear about the strategy they want to pursue
and they have the appropriate measures. In contrast, it can have undesirable
consequences if the model is incomplete and leaves out significant variables. In
this case, organizational effort will be misdirected.
90
Building on the previous point, the instructor can go back to Exhibit TN-2 and
ask students to draw top managers cause-effect relationships implicit in the
design of the performance scorecard (Exhibit TN-4).
Linked to this process, there is a shift of decision rights from branch officers to
top managers. When the only performance indicators were financial measures,
branch managers could achieve financial performance in several different ways.
However, when performance includes financial as well as non-financial
measures, the branch manager has less alternatives to achieve performance
because he has to perform in certain dimensions as specified by top managers.
The instructor could reinforce this discussion with the following questions:
What would happen if financials were good but non-financial measures (for
example standards) were bad?, would James be achieving Citibanks goals?
James performance evaluation
At this point in the class, the instructor may choose to take a vote. Usually, the
class is still strongly divided between students that see par as fair and those
that see below par as the appropriate evaluation.
What are the pros and cons of giving him either of these two ratings?:
Par
Below Par
*0
Rewards James effort.

Allows him to receive maximum
bonus.
*1
Gives credibility to new
system, otherwise it is
undermined.
*2
It is what James would
have received in previous years.
*3
Communicates the
importance of customer
satisfaction to the rest of the
organization.
*4
It is easier to
communicate.
*5
Systems should be
flexible to adapt to exceptions.
*6
We keep Jamess
motivation up. In the worst case,
he may resign if he feels that the
new system has penalized his
best efforts.
91
The problem facing Lisa and Frits is typical of a subjective performance

evaluation system. These systems have the advantage of being flexible to adapt
to special cases like James case and take into account information that objective
performance evaluation may not include. But, these systems have limitations.
First, they make hard decisions like this one even harder because the decision is
not objective: Lisa and Frits have the last word and there is a personal
component to it. In addition and to avoid the personal tension linked to a
negative evaluation, people using subjective evaluation tend to overstate
performance, there is evaluation inflation. Finally, subjective evaluation
encourages politics inside the organization in an effort to influence the decision
maker.
Conclusion
The above class outline is more than enough for a 75 minutes discussion and it
points out the most interesting learning points in the case. But the case is still
richer than what has been described up to now and the instructor can explore two
additional questions:
How would you communicate the decision to James?
Would you roll-out this performance scorecard to other regions at Citibank?
Students may want to know what happened: James got a below par rating on
customer satisfaction, but Frits chose to override the system and gave him an
overall above par rating for the year. To indicate the importance of customer
satisfaction, however, he awarded a 25% bonus in lieu of the maximum 30%.
But, as in all cases, the relevant issue is the learning points during the class
which can be summarized with the overheads in Exhibit TN-5.
92
Exhibit TN-1: The Relevant Organizational Structure
Frits
FritsSeegers
Seegers
President
President
Citibank
CitibankCalifornia
California
Other Area managers
Other branch managers
Lisa
LisaJohnson
Johnson
Area
Areamanager
manager
Los
Angeles
Los AngelesArea
Area
James
JamesMcGaran
McGaran
Branch
manager
Branch manager
Financial
FinancialDistrict
District
93
Support functions
Other branch managers
Exhibit TN-2: The Performance Scorecard

Variables
Standards
Standards
People
People
Control
Control
Measures
Leadership
Ethics / Integrity
Customer interaction
Community involvement
Contribution to overall business
Measured subjectively
through Lisas assessment
Performance
Teamwork
Training and development
Employee satisfaction
through Lisas assessment
Audit
Legal
Regulatory
by auditors, but using
standardized procedures
Customer
Customer
satisfaction
satisfaction
Strategy
Strategy
implementation
implementation
Financial
Financial
Measured through a survey by an

external company
Households
Cross-sell, splits, mergers
Retail asset balances
Market share
Measured objectively
Revenue
Expense
Margin
Measured objectively
94
Exhibit TN-3: James customer satisfaction ratings
Rating
Goal
80
72
66
63
54
First
quarter
Second
quarter
Third
quarter
Quarters
95
Fourth
quarter
Exhibit TN-4: Cause-effect relationships

Standards
Standards
People
People
Customer
Customer
satisfaction
satisfaction
Control
Control
Strategy
Strategy
implementation
implementation
Financial
Financial
96
Exhibit TN-5: Concluding overheads
Citibank: Performance Evaluation

The performance scorecard should be based on a business model
with cause-effect relationships.
To choose diagnostic measures, managers must evaluate
three criteria:
Alignment with strategy: Does it tell people what they
should be focusing on?
Measurability: Can it be measured?
Is it objective, complete, and responsive.
Linked to value: Are we confident that it creates
economic value?
97
Citibank: Performance Evaluation

The performance scorecard can be used as a diagnostic
system to communicate strategy if:
There are measures available to communicate strategy.
Cause and effect model relating leading and lagging
indicators is reliable.
If communication is the objective, choose impact over elegance
(i.e., keep it simple).
Use formula-based incentives when you are confident that
measures are correlated with economic value creation.
98

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Chapter 9: Behavioral and Organizational Issues in Management Accounting and Control Systems

In the context of a management accounting and control system, control refers to

The two broad technical considerations that designers of management accounting

Atkinson, Solutions Manual t/a Management Accounting, 6E

information in a flexible manner so that it can be customized for the decisions at

A statement of the organizations values and code of ethics.

A clear statement of the employees ethical responsibilities for every job

Adequate training to help employees identify ethical dilemmas in practice

Compelling evidence that senior management expects organization

Evidence that employees can make ethical decisions or report violations of

An ongoing internal audit of the efficacy of the organizations ethical

Atkinson, Solutions Manual t/a Management Accounting, 6E

cost per unit

profit per unit

9-17 Quantitative financial measures in a service organization include:

9-18 Quantitative nonfinancial measures of performance in a manufacturing

number of process problems

on-time delivery percentage

9-19 Quantitative nonfinancial measures of performance in a service organization

number of customer complaints (in a restaurant)

number of errors in processing claims (in an insurance organization, for

number of repeat customers (for all service organizations)

percent of flights with on-time arrival (in the airline industry)

9-20 Qualitative measures of performance include:

measures of customer satisfaction.

Atkinson, Solutions Manual t/a Management Accounting, 6E

Atkinson, Solutions Manual t/a Management Accounting, 6E

consistency criterion. Finally, employees should be able to use the systems

Atkinson, Solutions Manual t/a Management Accounting, 6E

Atkinson, Solutions Manual t/a Management Accounting, 6E

Extrinsic rewards are rewards provided to the individual by someone else.

Atkinson, Solutions Manual t/a Management Accounting, 6E

Atkinson, Solutions Manual t/a Management Accounting, 6E

The MACS design should incorporate the principles of an organizations

The ways in which organizations and individuals measure performance

Empowering employees in MACS design requires two essential elements

MACS design involves choosing the most appropriate reward systems to

Atkinson, Solutions Manual t/a Management Accounting, 6E

Preventive control: Preventive control is usually used in situations where

Monitoring: Monitoring involves inspecting the work or observing the

Results control: Results control is most useful in situations where

knowledge, or commitment to their jobs. For results control to be

a used car salesperson

a university professor (this is pretty close to home, however!)

Atkinson, Solutions Manual t/a Management Accounting, 6E

9-75 The competitive characteristics are low price, conformance to specifications,

9-77 (a) This form of budgeting is called consultative.

Atkinson, Solutions Manual t/a Management Accounting, 6E

Atkinson, Solutions Manual t/a Management Accounting, 6E

What Behavior Should

Wage plus performancerelated bonus

The focus will be on identifying market opportunities and directing the

Atkinson, Solutions Manual t/a Management Accounting, 6E

the number of new products developed, or the number of patentable

Some obvious positive points: this plan is very specific, it focuses on

Some obvious concerns: profit performance is a short-run performance

Profit-sharing pool = 4.51428% $332,000,000 = $14,987,410 (rounded)

Tightening standards every period reduces the motivational effects of this