Management Control Topic 5

Importance of Management Control

it is the final target of the management as it supervises and monitors all functions, resources, and processes

Management Control → Goal Setting → Identification and implementation of strategy

Moral Hazard

situations in which employees prefer to exert less effort (or report distorted information) compared with the effort (or accurate information) desired by the owner because the employee’s effort or accuracy cannot be accurately observed, monitored, and enforced

Incentives, Motivation and Goal Congruence Relationship

Incentives → Motivation (desire → effort) → Performance → Goal Congruence → Target (goals)

Non-Monetary Compensation Policies

• Flexible Hours

• Training

• Child Care Facilities

• Jb sharing/ Part time

Individual Incentive Systems

• time-based

• output-based

Team-Based Incentive Systems

• team performance is evaluated on the basis of time take rather than output produced

• Team based incentive foster cohesiveness among team members

• Payment may be cash bnous or non cah reward such as pleasure trip, time off, or luxury items

Organization Level Incentive Systems

• Profit Sharing

• Gain Sharing

• Co-partnership

• Employee Stock Option Plans

Compensation Plan for Employees

• Monetary and non-monetary

• Target is to reduce moral hazard

• They aim to align risk aversion among stockholders and managers

• They balance the firm risk (incontrollable environmental factors)

  • Base Salary (fixed)

  • Annual Incentives as cash bonuses

  • Long-term incentives such as stock options

SMART Targets

Specific

Measurable

Attainable (employees won’t be motivated if measure is impossible to implement)

Realistic (with respect to available resources, knowledge, and time)

Tangible (within reach; on time)

Conditions for Effective Incentive Systems

• Objectives: clear, well understood, broadly accepted

• Performance Measures: clear, understood, highly visible

• Rewards: clearly linked

• Compensation System: fair and equitable

• Feedback: prompt, clear, and unambiguous

Common Problems with Performance Measures (Individual Measures)

• Choose wrong performance measures

• “Dumbing down” the measurement data (too summarized it becomes meaningless)

• Establish unrealistic, non-attainable, non-tangible measures

• Focus exclusively on short term

Common Problems with Performance Measures (Several Measures Simultaneously)

• Inconsistency, conflicts, and unnecessary measures

• Too many or too few measures

• Measuring progress too often or not often enough (needs to be balance)

Other Problems with Performance Measures

• Encouraging competition at the expense of teamwork

Incentive Formula

• Incorporate an incentive contract and describe it in detail

• Clearly define the upper and lower limits

Subjectivity (In Designing Incentive System)

Reduces transparency, but allows adjustment when factors beyond the employee’s control have affected their performance