Chapter 9 Accounting 211

balance scorecard aligns employees to corporate goals and business objectives

- MACS designers include financial and non financial objectives - organizations move away from hierarchal structure (tall organization) those those with fewer layers (flat organizations)

profit sharing

- a cash bonus calculated as a percentage of of an organizational unit's reported profit - a group incentive compensation plan focused on short term performance

human resources model of motivation (HRMM)

- a contemporary managerial view that introduces a high level of employee responsibility for participation in decisions in the work environment - high level of employee responsibility - employees participation in decisions is expected - contemporary management view of motivation - reflects influence of Japanese management practices, and initiatives to improve the quality of working life - basis of the presentation of the four behavioral considerations

scientific management school/taylorism

- a 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 of motivation - money is the major driver of performance - tasks are broken down into small parts: there is a "science" for each part; time and motion studies - behavior should be monitored and controlled very carefully - incentives are provided to encourage jobs performed in the designed "best way" - repetitive tasks

human relations movement

- a managerial movement that recognizes people have needs beyond performing repetitive tasks at work and that financial compensation is only one aspect of what workers' desire

gain sharing

- a system for distributing cash bonuses from a pool - the total amount available is a function of performance relative to some target - a group incentive plan: 1. applies to a group of employees within an organizational unit, such as a department or a store 2. designed to promote teamwork

management accounting and control systems (MACS)

- a system that generates and uses information that helps decision makers assess whether an organization is achieving its objectives - about helping managers enhance decision making, guide the implementation of strategy, and evaluate the performance of managers or business units

cash bonus

- aka lump sum, merit pay - pays cash based on meeting a performance goal - one time award that does not become part of the employee's base pay in subsequent years - based on individual performance (not group)

goal congruence

- aligning of employees' goals with the organization's goals

gaming the performance indicator

- altering job related actions in an attempt to manipulate a performance indicator - attempt to manipulate a performance indicator through job related acts - employee behaviors are sub optimal to the organization - i.e. a salesperson might ask his coworker to give him credit for a colleagues sales bookings

preventive control

- an approach to control that focuses on preventing an undesired event - little discretion in performing a task; possibly performed by machine or computer - i.e. provide cash register receipt; safety inspections

MACS design: control methods

- at the core of diagnostic and interactive systems are two common methods of control: 1. task control 2. results control

dysfunctional behavior

- behavior that is not congruent with organization's goals or interests - i.e. embezzlement, sabotage

features of performance based incentive systems

- clear relationship between actions and rewards? - salary, bonus, stock related rewards? (current or deferred rewards?) - reward individual or group (firm) performance? - reward only controllable performance? - reward inputs or outputs? - financial or non financial performance? - absolute or relative performance? - objective or subjective evaluation?

intrinsic rewards

- come from within an individual and reflect satisfaction from doing the job - i.e. satisfaction from doing the job, growth opportunities the job provides, feeling of accomplishment and respect

technical considerations: the scope of the system

- comprehensive (complete) - must be comprehensive and include all activities across the entire value chain of the organization

motivation

- direction, intensity, and/or persistence - an individual's interest or drive to act in a certain manner

stretch targets

- exceed previous targets by a significant amount - organizations will try to reach much higher goals with the current budget - research suggests that stretch targets, which are targets deemed difficult but achievable by the people subject to the target, are the most effective in motivating performance levels

managing incentive plans

- experts debate whether compensation systems motivate goal seeking behavior and whether they are efficient (pay what is needed and no more) - some studies show a positive correlation between executive compensation and shareholder wealth - other studies report funding no, or even a negative, correlation between organization performance and executive compensation

interactive control system

- formal information systems managers use to involve themselves regularly and personally in the decision activities of subordinates - force a dialogue among all organizational participatants about the data coming our of the system and what action to take

diagnostic control systems

- formal information systems that mangers use to monitor organizational outcomes and correct deviations from standard measures of performance - systems that managers do not have to monitor on a regular basis - systems tend to run in a routine fashion

reward systems

- help motivate employees

conditions favoring incentive compensation

- incentive compensation systems work best in organizations in which employees have the skill and authority to react to conditions and make decisions

monitoring

- inspecting the work or behavior of employees while they are performing a task (listening or camera surveillance) - potential negative consequences (unnecessary stress or undermining trust)

internal measurement reliant

- invariably (in every case) provided by the organization's management accounting system - types: 1. cash bonus 2. profit sharing 3. gain sharing

participative budgeting

- joint decision making process in which all parties agree on a budget - empowering and motivating

data falsification

- knowingly altering records in one's favor

consultative budgeting

- managers ask subordinates for input but no joint decision making about budget targets occurs

technical considerations: relevance of the information generated

- measured by four characteristics 1. accurate - inaccurate data is not relevant 2. timely 3. consistent - means the language used and the technical methods of producing management accounting information do not conflict within various parts of the organization 4. flexible - customize MACS for local decisions; accommodate local needs of each division

input based compensation

- measures the time, knowledge, and skill level that the employee brings to the job, with the expectation that the unmeasured outcome is correlated with these inputs

results control

- measuring employee performance against stated objectives - rather than directly monitoring and controlling tasks, results control systems focus on measuring employee performance against stated objectives - organization must: 1. clearly define objectives 2. communicate objectives to appropriate personnel 3. design performance measures consistent with the objectives

earnings management

- methods by which managers knowingly manipulate the reporting of income - example: smoothing

budget slack

- misstating expenses/revenues to manipulate the budget (make it more attainable) - how to do this: 1. misallocation of resources within company 2. distorting performance information (downgrading efficiency to lower expectations - mitigated by: lengthy budget cycles in which all employees participate, provide higher level bonuses based on attaining higher targets

behavioral considerations

- motivate behavior congruent with the desires of the organization - four major behavioral characteristics should be considered when designing MACS: 1. embedding the organization's ethical code of conduct into MACS design 2. using a mix of short and long term qualitative and quantitative performance measures (balance scorecard approach) 3. empowering employees to be involved in decision making and MACS design 4. developing an appropriate incentive system to reward performance

requirements for profit sharing

- organization must be able to calculate profits - accounting system must be able to measure invested capital - MAC must provide the underlying measures of performance and overall performance score

flat organizations

- organizational structures with few layers

extrinsic rewards

- producing desired behavior results in an explicit (often financial) reward based on assessed performance - i.e. money, recognition in the corporate newsletter, stock options, or congratulations

other stock related incentive compensation plans

- provide incentive compensation to the participants when the stock price increases - designed to motivate employees to act in the long term interests of the organizations by acting to increase market (stock) value: it is assumed that stock markets will recognize good behavior with increased stock prices

control

- refers to a set of 1. procedures 2. performance measures 3. tools 4. systems 5. incentives - used to guide and motivate all employees to achieve organization objectives

stock price reliant

- relies on the performance of the organization's share price in the stock market - types: 1. stock options

incentive compensation/pay for performance

- reward systems that provide monetary (extrinsic) rewards based on achieving or exceeding measured results - require performance measurement systems that gather relevant and reliable performance information - rewards could be based on: 1. absolute performance 2. performance relative to some plan 3. performance relative to that of a comparable group

example of results control

- sales people may be evaluated on the volume of sales they make during a specific time compared to the volume they were expected to make

authoritative budgeting

- superior tells subordinate what their budget will be (no input) - straightforward and efficient

smoothing

- the act of affecting the preplanned flow of information without altering the organization's activities - accelerating or delaying the flow of data without altering the organization's activities - i.e. not reporting an expense on this period's balance sheet

persistence

- the duration of time that an employee will stay with a task or job

intensity

- the level of effort the employee expends

task control

- the process of developing standard procedures that employees are told to follow - process of finding ways to control behavior so that a job is completed in a pre specified manner - two categories: 1. preventive control 2. monitoring

stock options

- the right to purchase a unit of an organization's stock at a specified price, called the option price

direction

- the tasks on which an employee focuses attention

purpose of a budget

- tool for planning, coordinating, and resource allocation - also serves as a measure of performance and can be used as a tool to influence behavior

tall organizations

- traditional hierarchal organizations with many layers of management

technical considerations

- two categories 1. relevance of the information generated 2. the scope of the system

how to discourage dysfunctional behavior

- use multiple performance measures: helps employees focus on several dimensions of their job rather than just one - use financial and non financial measures: measure quality, speed to market, cycle time, flexibility, innovation, and productivity (uses balance scorecard to align employees to corporate goals and business unit objectives)

non-goal congruent behavior

- using too limited performance measures that motivate employees to focus solely on the goal instead of the broader picture - example: if salespeople are only evaluated on dollar value sold, they will focus on selling only the expensive merchandise

workers according to the scientific management school (taylorism)

- views are objectionable (unpleasant) -do not want to make decisions or exercise creativity on the job - should follow detailed, prescribed procedures developed by experts

dysfunctional behavior

- when employees manipulate or falsify performance measures - types: 1. gaming the performance indicator 2. data falsification 3. smoothing (a form of earnings management)

task control is most appropriate in the following situations

- when there are legal requirements to follow specific rules to protect public safety - when employees handle liquid assets (or other precious assets) to reduce the opportunity for temptation and fraud - when the organization can control its environment and eliminate uncertainty and the need for judgment

a system is in control if...

...it is on the path to achieving its strategic objectives and is deemed out of control if otherwise

elements of empowering employees

1. allowing employees to participate in decision making - increases employee morale and job satisfaction (results in increased productivity) - people are the best resource for process improvement ideas and innovation 2. educating employees so that they understand the information they use and how they are evaluated

three methods of setting budgets

1. authoritative budgeting 2. participative budgeting 3. consultative budgeting

incentive systems you must know

1. cash bonus 2. profit sharing 3. gain sharing 4. stock options

two related behavioral issues in budgeting

1. designing the budget process - how should budgets be determined, who should be involved in the budgeting process, and what level of difficulty should the budget be set to have the greatest positive influence on people's motivation and performance? 2. influencing the budget process - how do people try to influence or manipulate the budget to their own ends?

when designing jobs and specific tasks, system designers should consider the following three dimensions of motivation

1. direction 2. intensity 3. persistence

results control is most effective when

1. employees understand the company's objectives - they must understand how their contribution helps the organization to meet the stated objectives 2. employees have the knowledge and skill to take corrective actions and make decisions 3. the performance measurement system is designed to assess individual contributions - enables individuals to take action and make decisions that benefit both them and the organization

two categories of group compensation plans

1. internal measurement reliant 2. stock price reliant

types of reward systems

1. intrinsic rewards 2. extrinsic rewards

central assumptions of the human resources model of motivation

1. organizations operate under a system of beliefs - values purpose, and direction 2. people find work enjoyable and desire to participate in: - developing objectives - making decisions - attaining goals in their work environment 3. individuals are motivated by both financial and non financial means of compensation 4. employees have knowledge/information about their jobs - thus, employees can improve the way they perform tasks that will benefit the organization 5. individuals are highly creative, ethical, and responsible 6. employees desire opportunities to produce constructive changes

process of keeping an organization in control consists of the following four stages:

1. plan - develop an organization's objectives, choose activities to accomplish those objectives, and select measures to determine how well the objectives were met 2. do - implement the plan 3. check - monitor by measuring and evaluating the system's current level of performance; compare feedback about the system's current level of performance to the planned level in order to identify discrepancies and prescribe corrective action 4. act - take appropriate actions to return the system to an in control state

characteristics of a well designed management accounting and control system (MACS)

1. technical considerations 2. behavioral considerations

rewards can be based on inputs in three instances

1. when it is impossible to measure outcomes consistently 2. when outcomes are affected by factors beyond the employees control 3. when outcomes are expensive to measure

employee self control

a managerial method in which employees monitor and regulate their own behavior and perform to their highest levels

impact of MACS on behavior

without careful attention to behavioral factors... 1. goal congruence may not occur 2 . motivation may be low 3. employees may be encouraged to engage in dysfunctional behavior