management accounting chapter 10 - motivating behavior in management accounting and control systems...

Management Accounting Chapter 10 - Motivating Behavior in Management Accounting and Control Systems


Department of Accounting

Chapter 10

Motivationg Behavior in Management Accounting and Control Systems




Chapter Objectives:

To be able to:

1. Discuss the four key behavioral considerations in MACS design2. Explain the human resources model of management3. Discuss task and results control systems4. Apply the ethical control framework to decisions5. Understand the balanced scorecard and its applications6. Discuss the links between different incentive systems and performance




Chapter 9: Technical aspects of MACS designusing benchmarking and best practice.

Chapter 10:Behavioral characteristics of MACS design including human motivation.




The four key-behavioral considerations in a MACS design:

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.

4. Developing and appropriate incentive system to reward performance.




The Human Resource Management Model of Motivation

The scientific management schoolA management movement with the underlying philosophy that most people find work objectionable, that people care little for making decisions or showing creativity on the job, and that money is the driving force behind performance.

Human relations movementA managerial movement that recognizes that people have needs well beyond performing a simple repetitive task at work and that financial compensation is only one aspect of what workers desire.

Human resources model of motivationA more contemporary managerial view that introduces a high level of employee responsibility for and participation in decisions in the work environment.




The Organizations Ethical Code of Conduct and MACS Design, page 1 of 5

Ethical control system: A management control system based on ethics used to promote ethical decision making.




The Organizations Ethical Code of Conduct and MACS Design, page 2 of 5The elements of an effective ethical control system:(1) A statement of the organizations values and code of ethics written in practical terms, along with

examples so that the organizations employees can relate the statement to their individual jobs.

(2) 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.

(3) Adequate training to help employees identify ethical dilemmas in practice and learn how to deal with those they can reasonably expect to face.

(4) 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 of dealing with violations of the organizations code of ethics promptly, ruthlessly and consistently with the statement of consequences.- Provide visible support of ethical decision making at every opportunity.- Provide a private line of communication from employees directly to persons at a very high organizational level.

(5) Evidence that employees can make ethical decisions or report violations of the organizations states ethics without fear of reprisals from superiors, subordinates og peers int the organization.

(6) An ongoing internal audit of the efficacy of the organizations ethical control system.





The Wall Street Journal Workplace-Ethics Quiz (In Practice, page 401 and 402)

How to resolve ethical issues:

Exhibit 10-1 Decision Model for Resolving Ethical Issues

Motivation and goal congruence:

Goal congruence = The outcome when managers and employees goals are aligned with organizational goals (promotions, financial bonuses, advancing careers).





Behavioral Control Models:

Task Control: The process of developing standard procedures that employees are told to follow.

Two categories:• Preventive control = An approach to control that focuses on preventing an undesired event.

• Monitoring = Inspecting the work or behavior of employees while they are

perming a task. (”this call may be

monitored to ensure quality control”)




The Organizations Ethical Code of Conduct and MACS Design, page 5 of 5Behavioral Control Models:

Results Control: The process of hiring qualified pople who understand the organi-zations objectives, telling them to do whatever they think best to help the organization achieve its objectives and using the controlsystem to evaluate the resulting performance thereby assessing howwell they have done.

Effectiveness in Results Control:(1) Organization members understand the organizations objectives and their contribution to those objectives.(2) Organization members have the knowledge and skill to respond to changing situations by taking corrective actions and making sound decisions.(3) The performance measurement system is designed to assess

individual contributions so that an individual can be motivated to take action and make decisions that reflect their own and the organizations best interests.




Using a Mix of Performance Measures - The Balanced Scorecard approach

The need for multiple measures of performance

Examples of riscs having only one or very few performance measures:

Gaming the performance indicator: An activity in which an employee may engage in dysfunctional behavior to achieve a single goal.

Data falsification:The process of knowingly altering company data in ones favor.





Using a mix of financial/nonfinancial and quantitative/qualitative performance measures

Examples: Quantitative QualitativeFinancial Non-financial Non-financial

- Return on Investment - Production - Customer satisfaction - Net result - Sales - Image ratings - Growth - Quality measure - Shareholder value - Speed to market - Investment - Cycle-time - Financial efficiencies - Flexibility

- Innovation - Productivity - Growth - Market share - quantitative efficiencies - Environmental - Working conditions





The Balanced Scorecard, page 1 of 4The Balanced Scorecard, page 1 of 4

Definition: A systematic performance measurement system that trans-lates an organizations strategy into clear objectives, measures, targets, and initiatives organized by four perspectives:

• External financial perspective• Customer perspective• Internal business process perspective• Learning and growth perspective






External financial perspective:While considered traditional, financial performance measures are still used to determine whether an organizations strategy and objectives are affecting bottom-line financial performance. This perspective continues to be critical for both internal and external stakeholders. Examples of financial measures include operating income, return-on-capital employed and economic value added.

Customer perspective:The customer perspective measures the business units performance in targeted customer and market segment. The customer perspective typically uses customer outcome measures such as customer profitability, customer retention, customer satisfaction and market share.






Internal business process perspective:The internal business process perspective focuses on those processes that will increase value to customers and lower costs for improved performance. Using analyses that cut across the entire value chain, the internal business process perspective plays two roles. First, measures are developed to assess and improve existing processes. Second, the approach is used to develop new processes and new measures that will affect customer satisfaction and financial performance.






Learning and growth perspective:The focus on the learning and growth perspective is to address the thrree sources of organizational learning and growth: People, systems and organizational procedures. Measures for people include employee satisfaction and retention, training and skill development. Systems metrics determine whether information systems are producing accurate, reliable and consistent information that informs managers about their customers and business processes. Organizational metrics of success with appropriate reward systems.

The Balanced Scorecard - Illustration:The Balanced Scorecard - Illustration:Exhibit 10-3

The Balanced Scorecard - ExampleThe Balanced Scorecard - ExampleExhibit 10-4




Empowering employees to be involved in MACS design

Involvement in MACS design

• Motivate employees by participating in decision making, which gives them greater feelings of morale and job satisfaction.

• Ensuring that employees understand the information they are using and generating.




Developing Appropriate Incentive Systems to Reward Performance

Intrinsic rewards Those rewards that come from within an individual and reflect satisfaction from doing the job and the opportunities for growth that the job provides. (example: volunteers).

Extrinsic rewards Motivating desired behavior by providing an explicit, usually financial, reward




Developing Appropriate Incentive Systems to Reward PerformanceExtrinsic Rewards based on Performance, page 1 of 8

Incentive compensation systemsReward system that provides monetary (extrinsic) rewards based on measured results. Also called pay-for-performance systems. Is paid when achieving or exceeding measured performance.

Measured performance could be:

• absolute performance• performance relative to some plan• performance relative to that of some comparable group





Examples of absolute performance:

• The number of acceptable quality units produced• The organizations results• The organizations share price performance

Examples of relative performance:

• The ability to exceed a performance target level• The amount of a bonus pool• The degree to which performance exceeds the average performance of a comparable group





Conditions mandatory to be in place in order to motivate desired performance:

1. The employees must understand their jobs and the reward system and believe that it measures what they control and contribute to the organization.

2. Measuring on input or output? Ideally output rewards are what contribute to the organizations succes. In certain situations input are measured (for example by hours worked).

3. The organizations critical succes factors should be reflected. Must cover all relevant critical succes factors (balanced).





Conditions mandatory to be in place in order to motivate desired performance:

4. Setting clear standards that employees consider fair.

5. Calibrated. Should set a clear relationship between performance and outcome.

6. When it is critical that employees coordinate decision making and other activi- ties with other employees, the reward system should reward group rather than individual.





Conditions favoring incentive compensation:

• Authority to make decisions

Incentive compensation and employee responsibility:

• Must focus primarily on outcomes that the employee controls or influences.• Must reflect the nature of their responsibilities in the organization.• Must reflect the time frame related to the nature of the employees work tasks.





Types of incentive compensation plans:

Compensations plans can be divided into two categories:

1. Those that rely on internal measures.2. Those that rely on performance of the organizations share price.

Compensations plans relating to internal measures:

Cash bonus A payment method that pays cash based on som measured performance. Also called lump-sum reward, pay for performance, and merit pay.





Compensations plans relating to internal measures, continued:

Pay-for-performance Reward system that provides monetary rewards basedsystem on measured results. Also called incentive compensation

Profit sharing A cash bonus calculated as a percentage of an organization units reported profit; a group incentive compensation plan focused on short term performances.

Gainsharing A system for distributing cash bonuses from a pool when the total amount available is a function fo performance reative to some target. Is a group incentive.

Improshare ”Improved productivity sharing”. A gainsharing program that determines its bonus pool by computing the difference between the target level of labor cost given the level of production and the actual labor cost.





Compensations plans relating to external measures:

Stock option The right to purchase a unit of the organizations stock at a specified price, called the option price.

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