Chapter 2: Result controls

MANAGEMENT CONTROL
SYSTEMS
Performance Measurement,
Evaluation and Incentives

Kenneth A. Merchant & Win a. Van

der Stede
Second edition, 2007
 .

Submitted to:
 Dr.Basharat Naeem
Presented by Group:
Members Name: Registration Number:
1. Abdul Farhan CIIT/FA16-BAF-026/LHR
2. Areeba Aslam CIIT/FA16-BAF-003/LHR
 Learning Objectives

After reading this reader will able to understand the

concept of:
 Organizational Control
 Result control
 How to judge performance of employee?
 Elements of result control
 Condition determining the effectiveness of result control
 Organization control

The organization need a proper Management control

in order to stay in market for long time. Control
might be three main types
1. Cultural control
2. Action control
3. Result control
 Cultural control

Cultural control:
Refer to controlling behavior
Providing stability within the organization
A sense of belonging. Individuals who disrupt
normal behavioral patterns.
 Cultural control

Specific patterns of behavior and rules within a

professional environment.
Mission and visions
Rules and regulations
 Elements of Cultural control

There are two main elements of cultural control.

1. Individual self control
2. Social control
 Individual self control

A force by an individual that push most of the

people to perform the best way
Example: Order of executives or manger.
 Social control

A pressure exerted by workgroups on those who

deviate from group norms and value
Definition by Ogburn and Nimkoff: The patterns
of pressure which a society excerpts to maintain
order and established rule
 Types of Social Control

Formal Control:
 Law, legislation, administrative support in an organization
Informal Control:
 Customs, work norm, morality in an organization is a form of
informal control
 Action control

Ensuring that employees perform

certain actions known to be beneficial to the
organization
Involve observing the actions of individuals as they
go about their work.
 Forms of Action control

Action control are in four main components:

1. Behavioral constraints
2. Pre-action review
3. Action-accountability
4. Redundancy
 Forms of Action control (cont)..

Behavioral constraints:
Provide a preventive form of action control by
making difficult some undesirable behaviors.
Example:
 Locks
 Personnel identification
 Passwords, etc.
 Forms of Action control (cont)..

Pre-action review:
Involves observing the work of others before the task
is complete and making corrections if needed
Example:
 Planning reviews
 Approvals on capital expenditure proposals, etc.
 Forms of Action control (cont)..

 Action-accountability:
 Controls: similar to results accountability controls.
 Example:
 Defining the limits of acceptable behaviors
 Tracking the behaviors
 Punishing deviations
 Forms of Action control (cont)..

Redundancy:
The opposite factor in controlling
Involves assigning more employees (or machines) to
a task than the necessary
Should be avoided
 Result control

Result Control:
 Refers to motivate employees by giving them
rewards on the basis of the basis of their
performance
 It is necessary element of employee empowerment
 Result control

It creates meritocracies

Meritocracies: rewards are given to the most
talented and hardest working employees, rather than
those with the longest tenure or the right social
connections
 Case of US West Communications Group

In 1995, US West Communications Group

implemented a pay-for-performance system that
promised sales reps compensation increases of 20%
or more if they met performance goals. In the
following three years, revenues per employee had
increased by 47%.
All work tasks was a 22% gain in performance.
 Result control

How to judge performance of employee?

different business authors suggest three method to
judge the performance of employee
1. Decentralization
2. Management by objective
3. Franchising
 Decentralization

CEO of DuPont suggest the method to determined

the performance of employee
Decentralization means to replace the centralized
management hierarchy into SBUs
SBUs stands for small business units
Each SBUs is answerable to their task
 Saying on decentralization

One of the SBU manger of Dupont said:

“21 years ago when I joined DuPont, only the

concept is if you kept your nose clean and worked
hard, you could work as long as you wanted. But
today job security depends on results.”10 The
change was perceived as being successful”
 Saying on decentralization

Merrill’s CFO said about decentralization:

“Once accountability of the fully integrated profit and

loss was in place, people started to make tradeoffs.”

Managers pay more attention to their work that will

lead progress to business
 Saying on decentralization

Richard H. Chandler, CEO of Sunrise Medical said:

People want to be rewarded based on their own

efforts. [Without divisional accountability] you end
up with a system like the US Post Office. There’s no
incentive [for workers to excel]
 Saying on decentralization

The manager of Johnsons and Johnsons said

about decentralization
‘I think that where decentralization helps in
innovation is that it allows different people with
different skills, different thoughts, to bring
together different products and technologies to
satisfy the unmet needs of patients or customers’
 Advantages of decentralization

Greater Autonomy Empowers Employees

Reduces the burden on top executives
Facilitates diversification
Quick Decision Making
Ease of Expansion
It promotes motivation
 limitations of decentralization

Emergency Decision not Possible

Lack of Qualified Managers
Co-Ordination Difficulty
Waste of Resources
 Management by objective

The concept was described by Peter Druker in 1954.

Peter Druker (a dean of Science of management of
USA)
A clearly defining objectives that are agreed to by
both management and employees
The process of encourages the self control and self
confidence of worker
 Management by objective

J.Odiorine said about MBO:

‘A procedure where all hierarchical stages of an
organization, pointing the common purposes,
defines the area of responsibility of each person’
Example: Commission based job
Credit card sellers
 Management by objective

Example: Proshe enters the name of the worker

who installs each major engine component in the
engine’s log so if a fault appears later, it can be
traced back to the person responsible
 Components of MBO

1. Task setting
2. Performance reviewing
3. Rewards giving on basis of performance
 Components of MBO (cont)..

Task setting: All individuals are assigned a special

set of objectives
They try to reach during a normal operating period
Example:
 Employee X assigned to sell 50 credit cards in 1 month
 Employee Y assigned to manufacture 20 tyres in one week
 Components of MBO (cont)..

Performance reviewing:
Performance reviews are conducted periodically to
check productivity
Usually consist of interrogative sentence
Example:
 Is employee X sells upto 25 cards in 15 days to cover its target?
 is employee Y manufactured 10 tyres in 3 days to cover his
target?
 Components of MBO (cont)..

Rewards giving: Rewards are given to individuals

on the basis of how close they come to reaching their
goals.
Task setting

Performance
review

Assign
rewards
 Steps in MBO

Setting of organizational purpose and objectives

Key result area
Setting subordinates objectives
Matching resources with objectives
Appraisal
 Advantages of MBO

Improved Performance
Greater Sense of Identification
Maximum Utilization of Human Resources
Improved Communication
Improved Organizational Structure
Device for Organizational Control
 Limitation of MBO

Lack of Support of Top Management

Careless Attitude of Subordinates
Difficulties in Quantifying the Goals and Objectives
Costly and Time Consuming Process
Emphasis on Short Term Goals
Lack of Adequate Skills and Training
Poor Integration
 Franchising

A contract between two party (Franchisee and

Franchiser)
Franchisee use the claims of franchiser against some
predetermined loyalty fees
Long term agreement
 Franchising (cont)..

Franchiser: Who give its franchise

Franchisee: Who take a franchisee
Claims: Logo, plans, expertise in general, training
method and production techniques
 Franchising (cont)..

Example in Pakistan:
McDonald
Pizza Hut
Singer Plus
Subway
Burger king
Air Asia
 Advantages of Franchising

Motivated Management
Speed of Growth
Ease of Supervision
Increased Profitability
Improved Valuations
Penetration of Secondary and Tertiary Markets
 Limitation of franchising

High initial investment.

Limited creativity.
Lack of privacy.
Shared information.
Less control.
Damaged reputation.
 The control problems

Result control totally basis in assumption

May be employee cant perform in better way
May be manager not able to motivate employee
 Elements of result control

Measuring of Result control consists of four

steps:
1. Defining the dimensions
2. Measuring performance on these dimensions
3. Setting performance targets for employees
4. Providing rewards to encourage the behaviors that will
lead to the desired result
 Defining the dimensions

First step of a company is to setting a goals which

includes Missions and visions of a company that base
on the following:
1. Profitability
2. Customers satisfactions
3. Products defects
 Defining the dimensions

Example:
Motive of Askari bank is customer satisfaction
Motive to Emporium Mall is to provide
entertainment to general public not only for Allied
class
 Measuring performance

After defining the performance second step is to

measure the performance of:
 Managers as a team member
 Developing employee affectivity
 Measuring performance (cont..)

Managers as a team member:

Judging the performance of a manager according to
his leadership skills. For example how manager
motivate their employee in sense of productivity and
what outcome occurs against this act.
 Measuring performance (cont..)

Developing employee affectivity

The effectiveness of the employee can be measured by
observing:
1. Level of executions
2. Quality of work
3. Level of creativity
4. Amount of consistent improvement
5. Customer and peer feedback
 Measuring performance (cont..)

Precisely these measures are divided into two

elements:
1. Financial measures
2. Non financial measures
 Financial Measures

These measure is related to the finances of a firm

and occurs in high level organizations such as:
Net income
Earning per share
Return on assets
 Non financial measures

Those measures which doesn't directly related to the

financials of a company i.e:
Market shares
Growth
Goodwill
Customer satisfactions
 Performance measuring scale

Many scales are used to classify the perforamce but

most commonly used is ordinary scale which starts
from 1 (unsatisfactory) to 5 (very satisfied).
 Setting performance target

Performance targets affect behavior in two basic

ways
1. By stimulate action of employee
2. By employees to interpret their own performance
 Setting performance target (cont)..

By stimulate action of employee

One step to set the performance target is to motivate
the employee by giving them specific task to perform
and allow them to do according to their own desire.
 Setting performance target (cont)..

Allow employees to interpret their own

performance
Second factor to set the target performance is to give
the ownership to employee to their task and give
punishment and reward to him in final stage. This
will help employee to work independently and that
will lead to better performance of employee as well as
company
 Providing rewards

Rewards or incentives are the final important element

of a results control system. it can be in the form of
Salary hike
Bonuses
Promotions
Job security
Job assignment
 Providing rewards (cont)..

Training opportunity
Freedom
Reorganization
Powers
 Providing rewards (cont)..

A business writer quote about the meaning of reward

Reward is benefits provided by the employers,
usually money, promotion or benefits and
satisfaction derived from the job itself such as
pride in one’s work, a feeling of accomplishment
or being part of a team
[DECENZO AND ROBBINS]
 Providing rewards (cont)..

Types of rewards:
Some business author add a line about rewards. They
categorized reward into two forms
1. Extrinsic rewards
2. Intrinsic rewards
 Providing rewards (cont)..

Extrinsic reward:
a tangible and visible reward given to an individual
or an employee for achieving something. They are
ually have monetary value like bonus, reward etc.
 Providing rewards (cont)..

Intrinsic rewards:
Intrinsic rewards are the non-physical rewards. They
cannot be seen or touched but are emotionally
connected with the employees such as work
recognition, freedom, job security etc.
 Providing rewards (cont)..

Expectancy theory
Theory said that an individuals’ motivational force,
or effort, is a function of
1. Expectancies
2. Valences
 Providing rewards (cont)..

Expectancies:
Employee belief that certain outcomes will result
from their behavior (e.g. a bonus for increased effort)
Valences:
The strength of the employee preference for those
outcomes.
 Providing rewards (cont)..

Punishment is an opposite factor of reward that

will be given to employee with worst performance. it
includes:
Demotions
Supervisor disapproval
Threat of dismissal
Firing
 Conditions effective of result control

Following are the condition that determine the

effectiveness of result control:
1. Knowledge of desired result
2. Ability to influence desired results
3. Ability to measure controllable result affectivity
 Result desirability

Result desirability means that more of the quality

represented by the result measure is preferred less,
everything else being equal
For a result control organization must:
knowwhat results are desired
communicate those desires effectively to the employees
 Result desirability (cont)..

At general level Organization desires:

 Customer satisfaction
 Maximize Shareholder value
 Quality production
 Low cost products
 Result desirability (cont)..

Example:
 A company short of cash may want to minimize the
amount of inventory on hand
 A company with a cost leadership strategy may want to
emphasize the cost considerations
 A company with products with a quality image may
emphasize meeting or exceeding the specifications of
the materials being purchased
 Result desirability (cont)..

If the wrong result areas are chosen:

 Results measures is not congruent with the
organization’s true objectives
 Actually motivate employees to take the wrong
actions
 Ability to influence desired results

Second condition of effective result control:

The condition of the result control to be effective on the
employees whose behaviour are being controlled have
significant influence on the results
Accountable to their task
 Ability to influence desired results (cont)..

Perennial principle:
 Almost a self-evident proposition
 In appraising the performance of divisional
management
 No account should be taken of matters outside the
division’s control
 Ability to influence desired results (cont)..

Perennial principle (cont)..

A manager is not normally held accountable for:
 Unfavorable outcomes
 Credited with favorable ones if they are clearly due to
causes not under his control
 Ability to influence desired results (cont)..

Results can be occur in three forms:

 Controllable
 Favorable for organization
 Partial controllable
 Difficult to infer from the results measures
 Uncontrollable
 Unfavorable for organization
 Ability to influence desired results (cont)..

Result measure are useful only to the extent that

they provide information about the desirability of the
action
There are some uncontrollable factor existed which
affect the measures used to evaluate performance.
 Ability to influence desired results (cont)..

It become difficult to determine whether:

 The result achieved are due to the action taken
 Or uncontrollable factor
 Ability to measure controllable result

The final constraint limiting the feasibility of result

control
Term as organization has a ability to measure the
controllable result effectively
More ability mean more effectiveness in outcomes
 Ability to measure controllable result (cont)..

Measurement itself is rarely the problem

Result can’t measure effectively which include:
 organization truly desires
 employee involved
 Ability to measure controllable result (cont)..

How to measure result?

 If a measure evokes the right behaviors in a given
situation, then it is a good control measure.
 If it does not evokes the right behaviors in a given
situation, it is a bad one
 Ability to measure controllable result (cont)..

There are some measurement qualities without

being achieved them, result control will not be
effective.
1. Precision
2. Objective
3. Timeliness
4. understand ability
 Precision

Measurement Precision refers to the amount of

randomness in the measurement.
For precision to be high, the dispersion among the
values placed must be small
Without it the measure loses much of its information
value, it measures the risk of misevaluating performance
Employees also react negative when the know that
equally good performance are rated differently.
 Precision (cont)..

For example:
If 10 independent measurements show that the
quantity being measured is exactly 120.3, then the
measure is precise. If one can conclude only that
quantity is between 100 and 130, the measure is less
precise.
 Objectivity

Objectivity, which means freedom from bias

Another desirable measurement quality
If objectivity is low then the possibility of biases is
high
 Objectivity (cont)..

Example:
Where performance is self-reported or where
evaluates are allowed considerable discretion in the
choice of measurement methods, such as is true to
some extent with the measurement of accounting
income
 Objectivity (cont)..

Two main alternative to increase the measurement

objectivity:
 Measuring done by the people independent of the
process.
 Such as by personnel in the controller’s department
 Measurement verified by independent parties
 Such as auditors
 Timeliness

Lag between the employee’s performance and the

measurement of the result
Timeliness also has important measurement
qualities for two reason:
1. Motivation
2. Increase in intervention of result

Performance Result
 Timeliness (cont)..

Motivation:
Employees need consistent short term performance
pressure to perform at their best
Short term pressure can also make creativity in
employees to search for new and better way of
improving result
 Timeliness (cont)..

Increase in intervention of result:

If the problem is exist but performance measures are
not timely then it might not be possible to intervene
the problem before they cause sever harm
 Understandability

Understandability is the concept that information

should be presented so that a employee can easily
comprehend it
Assumes a reasonable knowledge of business by the
reader
Does not require advanced business knowledge to
gain a high level of comprehension.
 Understandability (cont)..

Two aspects of understand ability are important

within the organization:
1. Controlled behaviour of employee
2. Measurement of result by employee
 Understandability (cont)..

Controlled behaviour of employee

 The employees whose behaviours are being
controlled must understand what they are being held
accountable for which requirs
 Communication
 Training
 Motivation
 Understandability (cont)..

Example:
 Employees are to be held accountable for achieving
goals
 Understandability (cont)..

Measurement of result by employee

 Employees must understand what they must do to
influence the measure
 Each employee aware about their task
 Performance will lead to result
 Understandability (cont)..

Example:
Purchasing managers are held accountable for
lowering the costs of purchased materials
Improving negotiations with vendors
Increasing competition among vendors
Working with engineering personnel to redesign
certain parts
 Understandability (cont)..

Understandability is not a limiting factor

Measures cannot be classified as either clearly
effective or clearly ineffective
When employees understand what a measure
represents, they will figure out the result
 Conclusion

Result control is main element of management

control
Necessary element of employee empowerment
Higher the result control mean more profit in
organization