ACCT 701 Chapter 9 Atkinson

Behavioral and Organizational Issues in Management  Accounting and Control !stems Chapter 9

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Management Accounting and Control !stems "MAC# 

A major role for MACS is to motivate behavior congruent with the desires of the organization

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Technical Considerations  –  Relevance of information that is accurate timel!

consistent and fle"ible  –  Scope must be comprehensive and include all

activities across the entire value chain of the organization

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Management Accounting and Control !stems "MAC# 

A major role for MACS is to motivate behavior congruent with the desires of the organization



Technical Considerations  –  Relevance of information that is accurate timel!

consistent and fle"ible  –  Scope must be comprehensive and include all

activities across the entire value chain of the organization

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Ma$or Behavioral Considerations 

#mbedding the organization$s ethical code of conduct into MACS design

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%sing a mi" of short& and long&term long& term 'ualitative and 'uantitative performance measures

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#mpowering emplo!ees to be involved in decision ma(ing and MACS design

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)eveloping an appropriate incentive s!stem to reward performance

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Im%act o& MAC on Behavior  

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Man! managers tr! to implement new s!stems without considering the behavioral implications and conse'uences of a MACS  *egative conse'uences+  –  ,oal congruence ma! not occur   –  Motivation could be low  –  #mplo!ees ma! be encouraged to engage in

d!sfunctional behavior 

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Human 'esource Model o& Motivation "H'MM# 

Contemporar! management view of motivation

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-ased on initiatives to improve the 'ualit! of wor(ing life and the strong influence of .apanese management practices

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/ntroduces a high level of emplo!ee responsibilit! for and participation in decisions in the wor( environment

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Serves as the basis for the presentation of the four  behavioral considerations in MACS design © 2012 Pearson Prentice Hall. All rights reserved.

Central Assum%tions o& H'MM 

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0rganizations operate under a s!stem of beliefs about the values purpose and direction of their organization 1eople find wor( enjo!able and desire to  participate in+  –  )eveloping objectives  –  Ma(ing decisions  –  Attaining goals in their wor( environment

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/ndividuals are motivated b! both financial and nonfinancial means of compensation © 2012 Pearson Prentice Hall. All rights reserved.

Central Assum%tions o& H'MM 

#mplo!ees have a great deal of (nowledge and information about their jobs the application of which will improve the wa! the! perform tas(s and benefit the organization as a whole

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/ndividuals are highl! creative ethical and responsible

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#mplo!ees desire opportunities to effect change in their organizations

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(thical Code o& Conduct and MAC )esign 

A set of ethical principles is at the center of man!  boundar! s!stems

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MACS should incorporate the principles of an organization$s code of ethical conduct

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MACS that incorporate ethical principles can  provide decision ma(ers ma(ers with guidance as the! the! face ethical dilemmas

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Pressures A&&ecting MAC 

Managers are often subject to intense pressures from their job circumstances and from other influential organizational members members to suspend their ethical judgment in certain situations

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These pressures include the following re'uests+  –  to tailor information to favor particular individuals

or groups  –  to falsif! reports or test results  –  for confidential information  –  to ignore 'uestionable or unethical practices © 2012 Pearson Prentice Hall. All rights reserved.

Incor%orating (thics into a MAC )esign 

To incorporate ethical principles into the design of a MACS designers might attempt to ensure the following+  –  That the organiz organization ation has formulated implemented

and communicated to all emplo!ees a comprehensive code of ethics  –  That all emplo!ees understand the organization$s code of ethics and the boundar! s!stems that constrain behavior   –  That a s!stem e"ists to detect and report violations of the organization$s code of ethics © 2012 Pearson Prentice Hall. All rights reserved.

 Avoiding (thical )ilemmas 

Most organizations attempt to address ethical considerations and avoid ethical dilemmas b! developing a code of ethics

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#thical considerations listed in descending order of authorit!+  –  2egal rules  –  Societal norms  –  1rofessional memberships  –  0rganizational3group norms  –  1ersonal norms © 2012 Pearson Prentice Hall. All rights reserved.

(thical Hierarch! 

An action that is prohibited b! law should be unacceptable b! societ! b! one$s profession b! the organization and then b! each individual

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An action that is legall! and sociall! acceptable ma! be professionall! unacceptable and unacceptable to the organization and its emplo!ees

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)ealing *ith (thical Con&licts 

0rganizations that formulate and support specific and unambiguous ethical codes create an environment that reduces ethical conflicts

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0ne step is to maintain a hierarch! of authorit!

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)ealing *ith (thical Con&licts 

0rganizations that formulate and support specific and unambiguous ethical codes create an environment that reduces ethical conflicts

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0ne step is to maintain a hierarch! of authorit!

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'ole o& enior Management 

A critical variable that can reduce ethical conflicts is the wa! that the chief e"ecutive and other senior managers behave and conduct business

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/f these individuals demonstrate e"emplar!  behavior other organizational members will have role models to emulate

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0rganizations whose leaders evince unethical  behavior cannot e"pect their emplo!ees to behave according to high ethical standards

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Con&lict Bet*een Individual and Organizational +alues 

/f the organization$s code of ethics is more stringent than an individual$s code conflicts ma! arise

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/f adherence to the organization$s ethical code is re'uired and enforced the individual is as(ed and e"pected to pursue a more stringent code of ethics

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Con&lict Bet*een Individual and Organizational +alues 

/ssues ma! arise when the individual$s personal code of ethics prohibits certain t!pes of behavior that are legal sociall! acceptable professionall! acceptable and acceptable to the organization

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1otential for conflict in such situations is heightened when the action that is unacceptable to the individual is desirable to the organization

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The organization ma! re'uire that the person do things that he or she finds unacceptable © 2012 Pearson Prentice Hall. All rights reserved.

Con&lict *ith tated +alues 

#mplo!ees ma! observe management even senior management engaging in unethical behavior 

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This t!pe of conflict is the most difficult because the organization is misrepresenting its ethical s!stem

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The emplo!ee is in a position of drawing attention to the problem b! being a whistle&blower 

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Con&lict *ith tated +alues 

#"perts who have studied this problem advise that the individual should determine+  –  That the facts are correct and that a conflict e"ists

 between the organization$s stated ethical polic! and the actions of its emplo!ees in practice  –  4hether this conflict is institutional or reflects the decisions and actions of onl! a small minorit! of emplo!ees 

Most e"perts recommend that the emplo!ee wor( with respected leaders in the organization to change the discrepanc! between practiced and stated ethics © 2012 Pearson Prentice Hall. All rights reserved.

Con&lict *ith tated +alues 

0ther potential courses of action include+  –  1oint out the discrepanc! to a superior and refuse

to act unethicall!  –  1oint out the discrepanc! to a superior and act

unethicall!  –  Ta(e the discrepanc! to a mediator in the

organization if one e"ists  –  4or( with respected leaders in the organization to

change the discrepanc!

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Con&lict *ith tated +alues  –  ,o outside the organization to publicl! resolve the

issue  –  ,o outside the organization anon!mousl! to

resolve the issue  –  Resign and go public to resolve the issue  –  Resign and remain silent  –  )o nothing hoping that the problem vanishes

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Con&lict *ith tated +alues 

/f the organization is serious about its stated code of ethics it should have an effective ethics control s!stem to ensure and provide evidence that the organization$s stated and practiced ethics are the same including a means for emplo!ees to point out inconsistencies and to protect those emplo!ees

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(&&ective (thical Control 

To promote ethical decision ma(ing an ethical control s!stem should include the following+  –  A statement of the organization$s values and code of

ethics written in practical terms with e"amples that the emplo!ees can relate to their individual jobs  –  A clear statement of the emplo!ee$s ethical

responsibilities for ever! job description and a specific review of the emplo!ee$s ethical performance as part of ever! performance review  –  Ade'uate training to help emplo!ees identif! ethical

dilemmas in practice and learn how to deal with those the! can reasonabl! e"pect to face © 2012 Pearson Prentice Hall. All rights reserved.

(&&ective (thical Control  –  #vidence that senior management e"pects members

to adhere to its code of ethics meaning that management must+ 

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1rovide a statement of the conse'uences of violating the organization$s code of ethics #stablish a means of dealing with violations of the organization$s code of ethics promptl! ruthlessl! and consistentl! according to the statement of conse'uences 1rovide visible support of ethical decision ma(ing at ever! opportunit! 1rovide a private line of communication 5without retribution6 from emplo!ees directl! to the chief e"ecutive officer chief operating officer head of human resource management or someone else on the board of directors © 2012 Pearson Prentice Hall. All rights reserved.

(&&ective (thical Control  –  #vidence that emplo!ees can ma(e ethical

decisions or report violations of the organization$s stated ethics 5be the whistle&blower6 without fear of reprisals from superiors subordinates or peers  –  An ongoing internal audit of the efficac! of the

organization$s ethical control s!stem 

7ormal training is part of the process of promoting ethical decision ma(ing

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Motivation 

/n addition to fostering ethical behavior a central issue in MACS design is how to motivate appropriate behavior at wor( 

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4hen designing jobs and specific tas(s s!stem designers should consider the following three dimensions of motivation+  –  )irection  –  /ntensit!  –  1ersistence

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,oal Congruence 

,oal congruence8the organization and its emplo!ees align their respective goals

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The alignment of goals occurs as emplo!ees+  –  1erform their jobs well and are helping to achieve

organizational objectives and  –  Are attaining their individual goals at the same

time

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)iagnostic Control !stems 

#ven if goals are aligned different t!pes of tas(s re'uire different levels of s(ill precision responsibilit! initiative and uncertaint!

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/n most situations managers tr! to establish s!stems that the! do not have to personall! monitor on a regular basis

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These are called diagnostic control s!stems

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Interactive Control !stems 

/f there is a large degree of strategic uncertaint! managers spend much more time monitoring the decisions and actions of their subordinates

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These are called interactive control s!stems

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At the core of both s!stems are two common methods of control+ tas( control and results control

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-as Control 

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Tas( control is the process of finding wa!s to control behavior so that a job is completed in a  pre&specified manner  Tas( control can be bro(en down into two categories+  –  1reventive control  –  Monitoring

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-as Control 

Tas( control is most appropriate when+  –  There are legal re'uirements to follow specific

rules or procedures to protect public safet!  –  #mplo!ees handle li'uid or other precious assets  –  The organization can control its environment and

eliminate uncertaint! and the need for judgment

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'esults Control 

Results control methods focus on measuring emplo!ee performance against stated objectives

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The organization must have clearl! defined objectives communicated them to appropriate organization members and designed performance measures consistent with the objectives

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'esults Control 

Results control is most effective when+  –  0rganization members understand the

organization$s objectives and their contribution to those objectives  –  0rganization members have the (nowledge and s(ill to respond to changing situations b! ta(ing corrective actions and ma(ing sound decisions  –  The performance measurement s!stem is designed to assess individual contributions so that an individual can be motivated to ta(e action and ma(e decisions that reflect their own and the organization$s best interests © 2012 Pearson Prentice Hall. All rights reserved.

/eed &or Multi%le Measures o& Per&ormance 

The wa!s in which organizations measure  performance send signals to all emplo!ees and sta(eholders about what the organization considers as its priorities

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%sing multiple measures of performance helps emplo!ees focus on several dimensions of their  jobs rather than just (e!ing in on one dimension

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)!s&unctional Behavior  

0ccasionall! emplo!ees are so motivated to achieve a single goal that the! engage in d!sfunctional behavior+  –  ,aming the performance indicator   –  )ata falsification  –  Smoothing 5a form of earnings management6

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sing the BC to Align (m%lo!ees to ,oals 

MACS designers need to e"pand their views of the (inds of performance measures to use

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 *eed for measures of 'ualit! speed to mar(et c!cle time fle"ibilit! comple"it! innovation and  productivit!

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 *ew realities8the movement from tall: organizations to flat: organizations

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Change Management 

Research has shown that the single most important factor in ma(ing major changes to an organization is having management support

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#mplo!ees often resist change because the! feel threatened b!+  –  1otential loss of jobs  –  -eing reassigned to a new job  –  /ncreases in amount of wor( or responsibilit!  –  Changes in wor(place environment  –  Changes in compensation © 2012 Pearson Prentice Hall. All rights reserved.

(m%o*ering (m%lo!ees to e Involved in MAC )esign 

#mpowering emplo!ees in MACS design re'uires two essential elements+  –  Allowing emplo!ees to participate in decision

ma(ing  –  #nsuring that emplo!ees understand the

information the! are using and generating

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Partici%ation in )ecision Maing 

Research has suggested that emplo!ees who  participate in decision ma(ing feel greater morale and job satisfaction

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/n most industries people still perform the majorit! of wor( and have superior information and understanding

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MACS designers should enlist the participation of emplo!ees © 2012 Pearson Prentice Hall. All rights reserved.

(ducation to nderstand In&ormation 

#mpowering emplo!ees re'uires ensuring that the! understand the information the! use and on which the! are evaluated

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#mplo!ees at all levels must understand the organization$s performance measures and the wa! the! are computed in order to be able to ta(e actions that lead to superior performance

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#mplo!ees have to be constantl! re&educated as the s!stem and its performance measures change

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Incentive !stems 

T!pes of reward s!stems to motivate emplo!ees+  –  /ntrinsic rewards  –  #"trinsic rewards  –  0rganizations use man! s!stems of financial

rewards 

Theories of motivation+  –  #"pectanc! theor!  –  Agenc! theor!  –  ,oal setting theor!

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Intrinsic 'e*ards 

Come from within an individual and reflect+  –  Satisfaction from doing the job  –  ,rowth opportunities the job provides  –  The nature of the organization and t!pe of wor(

 performed 

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The challenge is to design jobs and develop a culture that lead emplo!ees to derive intrinsic rewards just b! wor(ing  *ot affected b! management accounting information © 2012 Pearson Prentice Hall. All rights reserved.

(trinsic 'e*ards 

An! reward that one person provides another to recognize a job well done  –  -ased on assessed performance  –  Reinforce the notion that emplo!ees have

distinguished themselves within the organization 

#"trinsic rewards ma! reinforce the perception that wages compensate the emplo!ee for a minimall! acceptable effort and that the organization must use additional rewards to motivate the emplo!ee to provide additional effort © 2012 Pearson Prentice Hall. All rights reserved.

Intrinsic vs. (trinsic 'e*ards 

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Man! compensation e"perts believe that organizations have not made enough use of intrinsic rewards Some argue that people who e"pect to receive a reward for completing a tas( successfull! do not  perform as well as those who e"pect no reward

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Intrinsic vs. (trinsic 'e*ards 

Most organizations ignore the role of intrinsic rewards in motivation and blindl! accept the view that onl! financial e"trinsic rewards motivate emplo!ees  –  Man! people believe that financial e"trinsic rewards

are both necessar! and sufficient to motivate superior performance 

-oth s!stematic and anecdotal evidence suggest+  –  7inancial e"trinsic rewards are not necessar! to

create effective organizations  –  1erformance rewards do not necessaril! create them © 2012 Pearson Prentice Hall. All rights reserved.

Intrinsic vs. (trinsic 'e*ards 

Some argue that an! incentive compensation  program is unacceptable  –  The! suggest that organizations must strive to be

e"cellent to survive in a competitive world  –  Superior and committed performance is necessar!

for all emplo!ees and is part of the contract of emplo!ment and does not merit additional pa! 

Man! organizations rel! on e"trinsic monetar! rewards to motivate performance

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Incentive Com%ensation 

/ncentive compensation reward s!stems provide monetar! 5e"trinsic6 rewards based on measured results  –  1a!&for&performance s!stems  –  -ase rewards on achieving or e"ceeding some

measured performance 

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Re'uire performance measurement s!stems that gather relevant and reliable performance information -ased on absolute performance performance relative to some plan or performance relative to that of some comparable group © 2012 Pearson Prentice Hall. All rights reserved.

 Asolute Per&ormance 

Measures of absolute performance include+  –  The number of acceptable 'ualit! units produced  –  The organization$s results  –  The organization$s share price performance

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'elative Per&ormance 

Rewards based on relative performance are those tied to the following+  –  The abilit! to e"ceed a performance target level  –  The amount of a bonus pool  –  The degree to which performance e"ceeds the

average performance level of a comparable group

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(&&ective Per&ormance Measurement 

Si" attributes must be in place for a measurement s!stem to motivate desired performance  –  #mplo!ees must understand their jobs and the

reward s!stem and believe that it measures what the! control and contribute to the organization  –  )esigners of the performance measurement s!stem

must ma(e a careful choice about whether it measures emplo!ees$ inputs or outputs

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(&&ective Per&ormance Measurement  –  The elements of performance that the performance

measurement s!stem monitors and rewards should reflect the organization$s critical success factors  –  The reward s!stem must set clear standards for  performance that emplo!ees accept  –  The measurement s!stem must be calibrated so that it can accuratel! assess performance  –  4hen it is critical that emplo!ees coordinate decision ma(ing and other activities with other emplo!ees the reward s!stem should reward group rather than individual performance

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Conditions 3avoring Incentive Com%ensation 

/ncentive compensation s!stems wor( best in organizations in which emplo!ees have the s(ill and authorit! to react to conditions and ma(e decisions

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4hen the organization has empowered its emplo!ees to ma(e decisions it can use incentive compensation s!stems to motivate appropriate decision&ma(ing behavior 

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Incentive Com%ensation and (m%lo!ee 'es%onsiilit! 

The incentive compensation s!stem must focus  primaril! on outcomes that the emplo!ee controls or influences

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#mplo!ees$ incentive compensation should reflect the nature of their responsibilities in the organization

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A mi" of rewarding both short& and long&term outcomes is consistent with the goals of the -alanced Scorecard approach

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'e*arding Outcomes 

/ncentive compensation schemes tie rewards to the outputs of emplo!ee performance rather than to inputs such as their level of effort

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/ncentive compensation based on outcomes re'uires that organization members understand and contribute to the organization$s objectives

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In%ut4Based Com%ensation 

Rewards ma! be based on inputs when+  –  /t is impossible to measure outcomes consistentl!  –  0utcomes are affected b! factors be!ond the

emplo!ee$s control  –  0utcomes are e"pensive to measure 

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/nput&based compensation measures the emplo!ee$s time (nowledge and s(ill level Man! organizations use some form of (nowledge&  based remuneration

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Managing Incentive Plans 

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Considerable evidence indicates that organizations have mismanaged incentive compensation plans  particularl! those for senior e"ecutives #"perts debate whether compensation s!stems motivate goal&see(ing behavior and whether the! are efficient

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Managing Incentive Plans 

Some studies show a positive correlation between e"ecutive compensation and shareholder wealth

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0ther studies report finding no or even a negative correlation between organization performance and e"ecutive compensation

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Man! professionals argue that the amounts are e"cessive and reflect high status rather than  performance The issue of fairness has also surfaced

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-!%es o& Incentive Plans 

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Most common incentive compensation plans+ cash  bonuses profit sharing gain sharing stoc( options performance shares stoc( stoc( appreciation rights participation units and emplo!ee stoc( ownership plans T!pes of group compensation plans+  –  Those that rel! on internal measures  –  Those that rel! on performance of the

organization$s share price in the stoc( mar(et 

Management accountants get involved in the first group © 2012 Pearson Prentice Hall. All rights reserved.

Cash Bonus 

A cash bonus plan pa!s cash based on some measured performance

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Cash bonuses can be+  –  7i"ed in amount 5triggered when measured

 performance e"ceeds the target6 or proportional to the level of performance relative to the target  –  -ased on individual or group performance  –  1aid to individuals or groups

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Pro&it haring 

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A cash bonus calculated as a percentage of an organization unit$s reported profit A group incentive compensation plan focused on short&term performance All profit&sharing plans define+  –  4hat portion of the organization$s reported profits

is available for sharing  –  The sharing formula  –  The emplo!ees who are eligible to participate in the plan  –  The formula for each emplo!ee$s share © 2012 Pearson Prentice Hall. All rights reserved.

,ain haring 

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,ain sharing is a s!stem for distributing cash  bonuses from a pool when the total amount available is a function of performance relative to some target ,ain sharing is a group incentive that usuall!+  –  1rovides for the sharing of financial gains in

organizational performance  –  Applies to a group of emplo!ees within an organization unit such as a department or a store 

,ain sharing promotes teamwor( and participation in decision ma(ing © 2012 Pearson Prentice Hall. All rights reserved.

toc O%tion Plans 

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A stoc( option is the right to purchase a unit of the organization$s stoc( at a specified price called the option price A common approach to option pricing is to set the option price at about ; of the stoc($s mar(et  price at the time the organization issues the stoc( option

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Other toc4'elated Plans 

0rganizations use man! other forms of stoc(& related incentive compensation plans

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These plans provide incentive compensation to the  participants when the stoc( price increases

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The! are designed to motivate emplo!ees to act in the long&term interests of the organization b! acting so as to increase its mar(et 5stoc(6 value

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