 Manager incur direct out – of –pocket cost by investing in (MCSs) in return

for one primary benefit : A higher probability that people will both work hard
and direct their energies to serve the organization’s interests.

 But MCSs sometimes also cause some indirect costs, often less obvious,
costs that can be many times greater than their direct costs.
 Some of these indirect costs are created by:

◦ Negative side effects that are inherent in the use of

specific types of control.
◦ Poor MCS design
◦ Implementation of the wrong type of control for a
given situation.
  Direct out-of-pocket costs:
It refers to the direct , monetary costs of implementing an MCS .These costs
should affect decisions about whether the benefits of particular type of
control justify the costs and whether one or another form of control should
be implemented.

 Easy to Measure  Can be Estimated

◦ Cash Bonuses ◦ The cost of the time

◦ Internal audit staffs employees spend in
◦ Recognition plaques planning and budgeting
activities or pre-action
reviews
 The direct cost of MCS in any organization should be
considered.

 For example:
The pre-action reviews of investment proposals by a senior
management committee, the marginal cost of the reviews
may be zero if all the committee members are employees or
only a nominal amount for some telephone calls or travel
required for the meetings . But the full cost of the time
consumed in reviewing and discussing the proposals may be
large. So, if the pre-action reviews are not necessary,
management time would be freed up to do other things, or
the size of the management staff could be reduced.
 Behavioral displacement:
 Result control
 Action control
 personnel/Cultural control

 Gamesmanship

 Operating delays

 Negative attitudes
 Behavioral displacement occurs when the MCS produces and actually
encourages behaviors that are not consistent with the organization’s
objectives, or at least with the strategy that has been selected .

 It is a common MCS-related side effect that can subject organization to

significant indirect costs. Also, it is most common with accountability-type
controls ( result/action accountability) where the specification of the results
or actions desired is incongruent or incomplete. But some forms of
personnel/cultural control can also produce the problem.
 In results control system, behavioral displacement
occurs when an organization defines sets of results
measures that are incongruent with the organization’s
true objectives.

 For Example :
When companies give their salespeople monthly sales
quotas, the sales people tend to work on the easiest
sales , not the most profitable or those with the
highest priority
For Example :
When companies reward their research scientists for
the number of patents filed, they are likely to see an
increase in the number of patents filed. however, this
incentive may lead only to patent proliferation. It
does not enhance researchers concerns for the
eventual commercial success of their discoveries.
 Why do organizations use measures that are
incongruent with the organization’s true objectives?

 The answer is that most commonly their managers

either :
◦ Have a poor understanding of the desired result
◦ Overrely on easily quantified results
 Poor understanding of the desired results

 Incorrect
Understanding
 Incomplete Specification

Results control can also cause displacement if there is an

incomplete specification of the desired results. Even
conscientious employees are induced to concentrate their
energy on the results monitored and emphasized by the
control system and to snub other, unmeasured result areas
that, in reality, may also be quite important.
For Example :
At gateway computers, in early 2000, shortly after jeef
weitzen became the chief executive officer ceo,
gateway started paying its sales representatives
higher commissions for selling add on services than
for selling pcs. Because of this change in
commissions. The sales reps became lax about selling
on frills computers. Sometimes they would even hang
up on customers who did not want add ons. As a
result gateway’s referral business, which once
accounted for 50% of total sales, fell to about 30%.
 Overquantification
◦ It is a tendency to concentrate on results areas that are
concentrate and quantifiable, rather than intangible,
difficult-to-quantify results areas that may be even more
important for organizational success.
◦ Avoiding quantified indicators is not the general solution to
these criticisms, because quantified indicators are not
inherently bad. They do have advantages, particularly with
regard to the clarity with which performance targets and
results can be communicated.
 One solution to the results control-related
displacement problem is to find or develop indicators
of the intangible results areas that may be missing in
order to alleviate the problems for which results
controls are being criticized.

 For Example :
An acceptable surrogate measure of quality might be
percent rejects and employee welfare might be assessed
by means of attitude surveys.
 One form of action control-related displacement is
often referred to as means-ends inversion.

 means-ends inversion: which means that employees

pay attention to what they do (the means) while
losing sight of what they are to accomplish (the ends)
 Sometimes action control-related displacement
occurs simply because the defined actions are
incongruent; that is, performance of the specified
actions does not contribute to the “true”
organizational objectives.
 Some action controls might have been useful at one time in
making employees’ behaviors more consistent, but over time
they discouraged employees from thinking about how they
might do their jobs better, and when the environment changed,
they hindered the employees’ abilities to see the changes and
react to them.

 In other words, they led to what is known as rigid,

nonadaptive behavior, a pathology commonly associated with
bureaucratic organization.
 Action controls and bureaucratization can be good in
stable environments with considerable centralized
knowledge about what actions are desired because
they help establish good, efficient work habits. In
changing environments with ill-informed top-level
managers, however, they became dangerous, even to
the point where they can threaten the survival of the
firm.
 behavioral displacement can also occur with personnel/
cultural controls. It occurs when organizations:

◦ recruit the wrong type of employees.

◦ Provide them with the wrong training .
◦ Strong cultures can also cause displacement when the
behavioral norms that groups use to guide the behaviors of
their members, or the measure used to provide group
rewards, are not line with what the organization desires.
 Sometimes personnel/cultural controls are
implemented in the wrong environment, rendering
them ineffective and encouraging unintended
behaviors.
 Promptly and accurately recognizing the problems
and diagnosing the causes are the keys to alleviating
the behavioral displacement problems.

 these processes require an assessment of whether

there is a difference between what employees are
supposed to do and what the control system motivates
them to do.
 Example:
Consider a department store that implemented a result
control system that rewards sales personnel based on
volume of sales they generate.
 After the introduction of the control system, sales
increased, but this turned out to be only a short-term
improvement.
 To alleviate the problems of infighting and neglect of
stocking and merchandise-arrangement duties , management
might consider rewarding salespeople for maintaining well -
stocked and neatly arranged department
 The management might consider redefining the sales
floor (areas of responsibility) to make the sales areas
independent so that the assigned salespeople would
see that it is to their own advantage to perform the
necessary maintenance activities to improve sales in
the area.

 Also, management might supplement the result

control with other types of controls.
 The actions that the employees take to improve their
performance indicators without producing any
positive economic effects for the organization.
 Gamesmanship has two major forms :

1. Creation of Slack Resources

2. Data Manipulation
I. Creation of Slack Resources

Slack involves the consumption of organizational

resources by employees in excess of what is
required; that is, consumption of resources by
employees that cannot be justified easily in terms
of its contribution to organizational objectives.
 Creation of Slack Resources (cont)

Slack creation often takes place when tight results

controls are in use; that is, when employees, mostly
at management levels, are evaluated primarily on
whether or not they achieve their budget targets.
 Creation of Slack Resources (cont)
• Managers who miss their target face the prospect of
interventions in their jobs, the loss of organizational
resources, the loss of annual bonuses and pay raises and
sometimes even the loss of their jobs.
 Budget slack
 One way in which managers keep tight results control from
hurting them is by negotiating highly achievable targets; that
are deliberately lower than their best-guess forecast of the
future. This is called budget slack.
 It protects the managers against unforeseen contingencies and
improve the probability that the budget target will be met, thus
increasing the likelihood of receiving a favorable evaluation
and associated performance-dependent rewards.
 Positive side
◦ It can reduce manager
tension
◦ Increase organizational
resiliency to change
◦ Make available some
resources that can be used
for innovation.
 Negative side
◦ It obscures true
underlying performance
◦ Distorts the decisions
based on the obscured
information, such as
performance evaluations
and resources allocation
decisions.
 Where performance can be accurately forecast or be
set in a top-down manner, it should be possible to
prevent, or at least mitigate slack. But these
conditions exist only in rare situations-highly stable
environment. If accountability controls are used in
other situations, slack must be considered to be
almost inevitable.
II. Data Manipulation

It involves an effort on the part of the employee

being controlled to look good by fudging the
control indicators.
 Data Manipulation Forms:

 Falsification
o Involves reporting erroneous data
 Data Management
o Involves any action designed to change the reported
results; such as sales, earnings, or a debt/equity ratio,
while providing no real economic advantage to the
organization and, sometimes, actually causing harm.
 Data management actions are designed to make the entity or
manager look better, such as to achieve a budget target or to
increase stock price. But some of these actions are designed to
make the entity look worse : sometimes managers save sales or
earnings for a future period when they might be needed.

 Sometimes they take a bath; they make results (look) worse in

bad times to get an advance on better results in the subsequent
period, and sometimes they report abnormally poor results to
try to lower the stock price to facilitate a management buyout.
 1. Accounting Methods
◦ It involves an intervention in the measurement process
◦ Individuals engaging in accounting methods can use the
flexibility available in either the selection of accounting
methods or the application of those methods, or both, to
manage earnings.
2. Operating Methods
o It involves the altering of operating decisions
o To boost earnings in the current period, managers can delay
the timing of discretionary expenditures, accelerate the sales
of assets, or work employees overtime to push out additional
shipments (sales) in the current accounting period.
 The operating methods of data management can be much more
costly to the firm than are the accounting methods.
 Most data manipulation methods are not illegal, but they are
costly.
 Manipulation is a serious problem because it can render an
entire control system ineffective. Also it can destroy the
accuracy of a company’s entire information system.
 Operating delays are an often-unavoidable
consequence of the preaction review types of action
controls and some of the forms of behavioral
constraints.

 It is caused by limiting access to a stockroom, by

requiring a superior’s signature approval, or by
requiring the typing of a password before using a
computer system.
 Where fast action is important, as it is in many
competitive markets, decisions delays can be quite
costly.

 Delays are a major reason for the negative

connotation associated with the word “bureaucracy” .
 Even when the sets of controls being used are well designed,
they can sometimes cause negative attitudinal effects,
including job tension, conflict, frustration, and resistance.
 Such attitudes are important because they are coincident with
many behaviors that can be harmful, such as gameplaying,
lack of effort, absenteeism, and turnover.
 Action Control

 Negative Attitudes
produced by
Result Control
 Negative Attitudes produced by Action Controls
◦ Most people, particularly professionals, react negatively to
the use of the action controls. Preaction reviews can be
particularly frustrating if the employees being reviewed do
not perceived the reviews as serving a useful purpose.
 Negative Attitudes produced by Results Controls
◦ One cause of the negative attitudes is lack of
employee commitment to the performance targets
defined in the MCS.
◦ Most employees are not committed to targets they
consider too difficult, not meaningful, not
controllable, unwise, illegal, or unethical.
 Negative Attitudes may also stem from problems in the
measurement system. It is common to hear managers complain
that their performance evaluations are not fair because they are
being held responsible for things over which they have little or
no control.

 Other potential causes of negative attitudes may be associated

with the rewards (or punishments) associated with the MCS.
Type of control Behavioral gamesmanship Operating Negative
displacement delay attitudes

Result control

Result accountability X X X

Action
Control
Behavioral X X
constraint
Preaction review X X
Action accountability X X X

Redunduncy X
Personel /
Cultural
control
Selection and X
placement
Training X
Provision of necessary
resources