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Motivating Behavior in
Management Accounting and
Control Systems

Central Focus and Learning Objectives

This chapter emphasizes many of the behavioral issues involved with
MACS system design and change management. After studying this
chapter students should be able to:
1. Discuss the four key behavioral considerations in MACS design
2. Explain the human resources model of management
3. Discuss task and results control methods
4. Apply the ethical control framework to decisions
5. Understand the balanced scorecard and its applications.
6. Discuss the links between different incentive systems and performance

Motivating Behavior in Management Accounting and Control Systems 1

Chapter overview Chapter 8 presents an in-depth discussion of a number of behavioral
and organizational issues related to the design of management
accounting and control systems (MACS) and MACS change. The
chapter presents three major schools of thought on how
management views human motivation. The three schools discussed
are Scientific Management, Human Relations, and Human
The Human Resource Model is the one around which the chapter is
built. This model, a synthesis of concepts from the Human
Relations Movement and Japanese management methods, relies
heavily on the value of employees to the organization. With this
view all employees are thought to be significant contributors to the
organization through their creativity and desire to work.
Thus, the MACS should be designed congruent with this view of
human motivation. Five key ideas are central for a well-designed
MACS. First, a multiple perspectives approach should be adopted.
This means that the organization develops an integrated system that
is consistent at a global level, but allows for a great deal of
flexibility at local levels. Another central idea is the incorporation of
an ethical code of conduct. Other key concepts such as the
importance of quantitative and qualitative information, the
participation and empowerment of employees, and reward systems
tied to performance round out the characteristics of a well-designed
MACS. The chapter also discusses behaviors such as smoothing,
gaming, and data falsification that arise when a MACS is poorly
designed. The chapter concludes with a discussion of incentive
plans and profit sharing.

Teaching tips The material in this chapter covers a number of behavioral

topics. Usually, I stress to students that modern management
accounting has strong economic and behavioral consequences.
Typically, textbooks focus on the economic issues and ignore
behavioral ones; however, behavioral issues are assuming
immense importance as organizations attempt to successfully
implement ABC and other management accounting methods.

Recommended 1. At&T Paradyne, Harvard Business School Case 9-195-165;

cases This case illustrates the change from an obsolete to an ABC
system. It also illustrates how a single MACS can be used to
serve diverse roles.
2. RKO Warner Video, Inc.: Incentive Compensation Plan,
Harvard Business School Case 9-190-067; Teaching Note
5-190-190. This case details the design and implementation of
an incentive bonus plan for video store managers.
3. Ben & Jerry's Homemade Ice Cream, Inc.: Keeping the
Mission(s) Alive. Harvard Business School case 9-392-025;
Teaching Note 5-395-238. This case discusses the problems in

Motivating Behavior in Management Accounting and Control Systems 2

maintaining both the companys counter-cultural style and the
difficulty and importance of the general manager's responsibility
in reconciling company values with commercial imperatives;
considers the effect of compensation policy on morale and
organizational effectiveness.
4. Nordstrom: Dissension in the Ranks? Harvard Business School
Case 9-191-002. Supplement 9-192-027; Teaching Notes
5-692-085 and 5-192-026. In 1989, the performance
measurement systems and compensation policies of Nordstrom
Department Stores unexpectedly came under attack by
employees, unions, and government regulators.
5. Performance Pay at Safelite Auto Glass (A); Harvard Business
School Case 9-800-291; Supplement 9-800-292. The case
describes a company's changing of its compensation and
incentive plan.
6. Tektronix: Portable Instruments Division (A), Harvard Business
School Case 188-142.
7. Tektronix: Portable Instruments Division (B), Harvard Business
School Case 188-143. Both the Tektronix cases discuss the
implications of changing to more advanced cost management
systems and the behavioral effects of such changes.
8. Disctech Inc. Harvard Business School Case 9-187-066. This
case is about fraudulent information manipulation by managers
who had the support of top management. This is an excellent
case to use to discuss ethical issues.
9. Westchester Distributing, Inc. (A) [HBS #9-191-118] and (B)
[HBS # 9-191-119]; TN is HBS # 5-191-172]. Westchester
Distributing is a California beer distributor whose
owner/manager has just learned that employees are providing
kickbacks to customers and covering the cost of the kickbacks
by falsifying lunch receipts. Firing the guilty workers could
result in a shutdown of the business by the state regulatory
authorities. The case focuses on the interplay between internal
control, employee behavior, and incentives. This is one of my
favorite ethics cases; it always results in a lively discussion.
Unlike many textbook ethics situations, it is factually realistic
and has no simple answers.

Chapter outline I. In Chapter 8, four key behavioral considerations in MACS

design were introduced.
Learning Objective 1: A. A well-developed MACS
Discuss the four key 1. Incorporates the organizations ethical code of conduct
behavioral 2. Uses a mix of short and long-term qualitative and
considerations in quantitative performance measures, or uses a balanced
MACS design. scorecard approach
3. Empowers employees to be involved in decision
making and MACS design
4. Includes an appropriate incentive system to reward

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Learning Objective 2: II. The human resources model of management is an approach
Explain the human to human motivation that emphasizes that:
resources model of A. Individuals do not find work objectionable
management. B. They have knowledge to contribute, and that
C. They are creative. With this model managers often focus
on three aspects of employee motivation:
1. Direction where the focus of attention is at work
2. Intensity the level of effort expended
3. Persistence the duration of time spent on the task or
D. When employees have aligned their individual goals with
those of the organization, goal congruence is said to

Learning Objective 3: III. Task and results control systems are alternative ways of
Discuss task and assuring that desired outcomes are achieved.
results control A. Task control is the process of assuring that a task is
systems. completed in the desire manner.
1. Standard operating procedures may be implemented to
guide employee activities.
2. Task controls may specify penalties for non-
compliance with established procedures.
B. Results controls depend on the motivation of employees to
achieve organizational objectives.
1. Results controls reward employees for their
contributions to the achievement of organizational
2. Consequently, employees need a clear understanding of
the organizations objectives, and the relationship of
their performance to organizational success.

Learning Objective 4: IV. A well-designed MACS should incorporate the behavioral

Apply the ethical standards reflected in the organizations code of ethical
control framework to conduct.
decisions. A. The MACS should include a system that reinforces the
ethical responsibilities of all firm employees. Most
organizations attempt to avoid ethical dilemmas by
developing a code of ethics. Note that this is one of
several hierarchies that organizations can use.
1. A hierarchy of ethical principles listed below,
captures the broad array of ethical considerations.
a. Legal rules
b. Societal norms
c. Professional certification (CPA, CMA, etc.)
d. Organizational or group norms
e. Personal norms
2. Dealing With Ethical Conflicts. Different kinds of
conflicts can arise for employees in an organization.
These include:

Motivating Behavior in Management Accounting and Control Systems 4

a. Conflicts between individual and organization
b. Conflicts between the organizations stated and
practiced values.
3. The elements of an effective ethical control system are:
a. A statement of the organizations values and code
of ethics that is stated in practical terms, and that
uses examples
b. A clear statement of the employees ethical
responsibilities for every job description
c. Adequate training to help employees identify
ethical dilemmas in practice, and learn how to deal
with those dilemmas
d. Evidence that senior management expects
organization members to adhere to its code of
e. 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
f. Providing for an ongoing internal audit of the
efficacy of the organizations ethical control system

Learning Objective 5: V. The balanced scorecard is a set of performance targets and

Understand the an approach to performance measurement that stresses
balanced scorecard meeting all the organizations objectives relating to both its
and its applications. primary and secondary objectives hence, the balance. To
achieve this balance, the balanced scorecard examines the
organization from four different perspectives:
A. External financial perspective (how do we look to external
[and internal] financial stakeholders?) Indices include:
1. Operating income
2. ROI
3. EVA
B. Customer perspective (how do we look to our customers,
and what are their individual contributions to our
profitability?) Indices include:
1. Customer profitability
2. Customer satisfaction
3. Customer retention
4. Market share
C. Internal business perspective (how can we improve
processes to add value to customers and improve financial
performance? What is the short list of things that we must
excel at?) Measures include:
1. Improvements in internal processes
2. Measures of critical technologies
D. Learning and growth perspective (how does the

Motivating Behavior in Management Accounting and Control Systems 5

organization evolve to continue to meet the challenges of
competitors and changes in the marketplace?) Indices
include such characteristics as:
1. Employee satisfaction
2. Employee retention
3. Training
E. The balanced scorecard requires the development and use
of both quantitative and qualitative measures in a
timely fashion for control, motivation, and performance
evaluation. In general, there are three types of measures:
1. Quantitative financial measures
2. Quantitative nonfinancial measures
3. Qualitative measures. Example are discussed below:
a. Quantitative measures include financial measures
such as net income and physical measures such as
the number of units produced.
b. Quantitative nonfinancial measures include yield,
cycle time, schedule adherence, defects, etc.
c. Qualitative measures include image and reputation.

Learning Objective 6: VI. Factors affecting individual motivation

Discuss the links A. Organizations use two broad categories of rewards to
between different motivate people:
incentive systems and 1. Intrinsic rewards are those relating to the nature of
the organization and the design of the job, that people
experience without the intervention of anyone else.
These rewards come from inside the individual and
include satisfaction and feelings of accomplishment.
2. Extrinsic rewards are those based on performance
that are provided to the individual by the organization.
These include trips, financial rewards, and employee
B. Beliefs about the types and mix of rewards (intrinsic
versus extrinsic rewards) vary considerably and there are
numerous debates on the issue. On the one hand, some
argue that not enough emphasis is placed on developing an
environment from which intrinsic rewards for individuals
can be derived. On the other hand, some claim that
extrinsic rewards are the most motivating types of rewards
and that people respond best to money and external
recognition that is based on their performance. Each
organization must decide on the type of work environment
it would like to develop and the mix of both types of
C. Rewards based on performance
1. Incentive compensation or pay-for-performance is a
system that provides rewards for performance to
motivate achieving, or exceeding, measured
performance targets.

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2. Rewards can be based on absolute performance as in
piece-rate incentive schemes for the number of good
products produced.
3. Rewards also can be based on relative performance
such as paying the top insurance salesperson a bonus
each month.
D. Effective performance measurement and reward systems
1. If the organization has decided to reward performance,
five broad characteristics should be considered to
ensure that the performance measurement system will
be effective.
a. Individuals must understand their jobs and know
how to improve their performance.
b. The reward system has to be understandable and
employees have to be able to see how improved
performance will affect rewards.
c. The reward system has to measure the employees
controllable performance, and minimize or
eliminate uncontrollable factors.
d. The measurement system must measure the objects
of measurement systematically and accurately.
e. Where appropriate, incentives should consider
rewarding groups, rather than individuals.
2. Conditions favoring incentive compensation
a. Incentive compensation seems to work best in
decentralized systems where employees are
empowered and can use their skill and authority to
react to situations and make decisions.
3. Incentive compensation and employee responsibility
a. An employees compensation should reflect the
nature of his or her responsibilities. For instance,
those who work in daily operations should have
rewards that are tied to short-term measures such
as customer service; those who work on
intermediate- term projects should be rewarded
based on meeting budgets; and, finally, those who
work on long-term projects should be rewarded on
measures such as long-term growth or process
4. Rewarding outcomes
a. Employees provide two types of inputs to an
organization. These are time and skill. Incentive
system designers usually look to the outputs of
employees as measures of how employees use their
inputs on the job. As employees bring more skill
and experience to a job, they are rewarded with
some form of knowledge-based pay. Thus,
employees are encouraged to keep upgrading their

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E. Managing incentive compensation plans
1. There is controversy over the management of
compensation plans, especially at the senior executive
level. The criticism is that senior executives have been
overpaid for mediocre performance. This perceived
unfairness has tended to discourage lower-level
employees beliefs that incentive compensation systems
are equitable.
2. Incentive compensation plans require the
participation and empowerment of employees in
system design and improvements.
a. Employee empowerment means providing
employees the ability to affect their work
environment through more discretion and
b. Participation in decision making is a decision-
making process in which all parties jointly decide
on a plan of action.
F. Development of mechanisms such as reward systems tied
to performance to promote motivation and goal
congruence between the organization and employees to
reduce dysfunctional behavior.
1. In practice there are very few MACS with all five of
the above characteristics, however, many organizations
are striving to incorporate these characteristics. In
essence, the chapter is suggesting a normative model
of MACS design.
G. Behavioral consequences of poorly designed systems
1. Behaviors that are not goal congruent with the
organization. Goal congruence is the alignment of
individual and organizations goals. Types of non-goal
congruent behavior include:
a. Smoothing occurs when an employee alters the
pre-planned flow of information without altering
actual behavior.
b. Gaming occurs when an employee alters his or her
planned actions as a result of a particular kind of
performance indicator.
c. Building budget slack or requesting resources in
excess of those needed to accomplish the goals set
forth in the budget is an example of gaming.
d. Data falsification is the act of knowingly falsifying
H. Types of incentive compensation plans
1. A cash bonus, or a lump sum reward, is a cash award
based on some measured performance. Cash bonuses,
which can be based on individual or group
performance, are given when performance exceeds a

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2. Profit-sharing is a cash bonus system where the total
amount available for distribution as cash bonuses is a
function of the organizations, or an organization
units, reported profit. Thus, profit-sharing is a group
incentive plan.
3. Gain sharing is another group incentive system where
the total amount available for distribution as cash
bonuses is a function of performance relative to some
target (usually the difference between the actual and
the target level of labor cost). The three most widely-
used gain sharing programs are:
a. Improshare (Improved Productivity Sharing)
determines its bonus pool by calculating the
difference between the target level of labor cost,
given the level of production, and the actual labor
b. Scanlon Plans. A Scanlon Plan works as follows:
(1) First a base ratio is calculated using past data.
Base Ratio = Payroll Costs) / Value of Goods
or Services Produced
(In any period in which the ratio of payroll costs
are less than the base ratio, the labor savings are
added to the bonus pool.)
(2) Rucker Plan. A Rucker plan also works on a
ratio based on past data.
Rucker Standard = Payroll Costs /
Production Value
where production value = (net sales inventory
change materials and supplies used). The
Rucker Plan is similar to the Scanlon plan, when
actual labor costs are less than the Rucker
standard, its employees receive a bonus.
4. A stock option is a right to purchase a stated number
of the organizations shares at a stipulated price (the
option price). The general idea behind stock options is
to motivate employees to act in the long-run interests
of the organization by taking actions and making
decisions that will increase the organizations market

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Chapter quiz

1. The Human Resources Model of motivation:

a. recognizes that workers needs go beyond financial compensation.
b. was strongly influenced by Japanese management methods.
c. assumes that employees require constant monitoring and careful control.
d. (a) and (b)

2. The following all are characteristics of the Scientific Management View of human
motivation, EXCEPT:
a. employees need to be monitored and controlled tightly.
b. people dislike work.
c. people have little desire to be creative at work.
d. employees have good insight into work and should be asked to participate in all

3. The multiple perspectives approach to MACS design adopts:

a. the idea that participation and empowerment of employees should be avoided.
b. a consistent, technical structure that does not allow for flexibility at local levels of
the organization.
c. a consistent, technical structure that also allows for flexibility at local levels of the
d. the notion that rewards should never be tied directly to performance of employees.

4. An organization develops an ethical code of conduct because:

a. its Boards of Directors mandates it.
b. it desires to immediately fire those employees who do not believe in its ethical
c. it hopes to reduce ethical conflicts by avoiding ambiguity or misunderstandings.
d. it hopes to silence its critics.

5. The most recent trend for many MACS designers is to:

a. use only qualitative measures of performance.
b. use only quantitative measures of performance.
c. use quantitative, financial, and qualitative measures of performance.
d. use quantitative, financial, nonfinancial and qualitative measures of performance.

6. A MACS is considered poorly designed if:

a. it lacks one or more of the five key characteristics of well-designed MACS.
b. it was designed by middle level managers.
c. it cannot eliminate all smoothing, gaming and data falsification actions within one
d. it lacks three of the five key characteristics of a well-designed MACS.

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7. If an employee knowingly changes numbers to misrepresent financial reports, we call
a. gaming.
b. data falsification.
c. smoothing.
d. data dredging.

8. A well-functioning control system:

a. requires that employees be constantly re-educated.
b. should function indefinitely without modification.
c. is unrelated to the strategic and competitive goals of the organization.
d. (b) and (c)

9. Continuous education has all of the following advantages, EXCEPT:

a. employees skills are kept up to date.
b. that, on average, it costs an organization approximately 10% of its annual
operating budget.
c. employees learn about organizational changes and improvements.
d. employees become more committed to their jobs as they believe the organization is
making an investment in them.

10. Under the Rucker plan, the Rucker standard is:

a. payroll costs/inventory value
b. net cash inflow/value of production or service
c. payroll costs/production value
d. net cash inflow/net sales

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Solutions to chapter quiz

1. d
2. d
3. c
4. c
5. d
6. a
7. b
8. a
9. b
10. c

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