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    Chapter 12

    Uploaded by

    Yuxuan Song
    This document discusses considerations for using financial results controls in the presence of uncontrollable factors. It examines whether employees should be accountable for factors they can or cannot control. It also explores how to determine when and how to make adjustments for uncontrollable factors in performance evaluations and compensation.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd

    Chapter 12

    Uploaded by

    Yuxuan Song
    249 views15 pages
    This document discusses considerations for using financial results controls in the presence of uncontrollable factors. It examines whether employees should be accountable for factors they can or cannot control. It also explores how to determine when and how to make adjustments for uncontrollable factors in performance evaluations and compensation.

    Original Description:

    MOS 4471 of UWO

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    © © All Rights Reserved

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    This document discusses considerations for using financial results controls in the presence of uncontrollable factors. It examines whether employees should be accountable for factors they can or cannot control. It also explores how to determine when and how to make adjustments for uncontrollable factors in performance evaluations and compensation.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    249 views15 pages

    Chapter 12

    Uploaded by

    Yuxuan Song
    This document discusses considerations for using financial results controls in the presence of uncontrollable factors. It examines whether employees should be accountable for factors they can or cannot control. It also explores how to determine when and how to make adjustments for uncontrollable factors in performance evaluations and compensation.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 15

    Slide 12.

    Chapter 12:
    Using Financial Results Controls in
    the Presence of Uncontrollable
    Factors

    Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, Pearson Education Limited 2012

    Slide 12.2

    Controllability principle

    Employees should be held accountable only for that


    which they alone can control; or,

    Employees should be held accountable only for that


    over which they have significant influence?

    Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, Pearson Education Limited 2012

    Slide 12.3

    Rationale

    Uncontrollable factors distort performance measures


    and evaluations

    Uncontrollable risks are best borne by shareholders


    (who are better able to diversify them)
    If managers bear the risk:
    They must be compensated for it
    They may engage in undesirable actions to protect
    themselves from the risks

    For example, by engaging in gameplaying behaviors

    Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, Pearson Education Limited 2012

    Slide 12.4

    Considerations

    Purpose(s) for which adjustments for


    uncontrollables are made?
    Salary raises
    Incentive pay (short-term, long-term)
    Job retention

    Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, Pearson Education Limited 2012

    Slide 12.5

    Considerations (continued)

    Types of uncontrollables for which adjustments


    are made?
    Acts of nature (force majeure)
    Economic, competitive factors
    Interdependencies
    Uncontrollables due to decisions made by personnel in
    other parts of the organization, such as at higher levels
    or in other entities

    Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, Pearson Education Limited 2012

    Slide 12.6

    Considerations (continued)

    Who makes the adjustments?


    Immediate superior
    Upper management
    (Compensation committee of the) Board of Directors
    Done automatically by predetermined formulae/rules

    Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, Pearson Education Limited 2012

    Slide 12.7

    Considerations (continued)

    Which method to use to make the adjustments?


    Variance analysis
    Flexible performance targets (e.g., flexed budgets)
    Relative performance evaluations (RPE)
    Subjective judgments

    Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, Pearson Education Limited 2012

    Slide 12.8

    Other choices

    Should the adjustments be total or partial?

    Should the adjustments be for negative


    uncontrollable factors only (i.e., bad luck),
    or should adjustments be made in either direction,
    both positive and negative?

    Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, Pearson Education Limited 2012

    Slide 12.9

    How to decide?

    Costs vs. benefits


    For some types of adjustments, the benefits clearly
    outweigh the costs
    Factor is totally uncontrollable
    Manager is not expected to respond to the factor
    The effect of the uncontrollable factor can be
    calculated objectively

    Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, Pearson Education Limited 2012

    Slide 12.10

    How to decide? (continued)

    Benefits of making adjustments


    More accurate performance evaluations
    Less manager frustration; better motivation
    Better decision-making; less noise in the
    performance measures
    Lower compensation costs
    (in the long run less risk, less turnover)

    Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, Pearson Education Limited 2012

    Slide 12.11

    How to decide? (continued)

    What if the company wants the managers to


    respond to an uncontrollable factor?
    Should not buffer them completely from the effects
    Consider partial adjustment

    Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, Pearson Education Limited 2012

    Slide 12.12

    How to decide? (continued)

    What if the effect of the uncontrollable


    factor can only be estimated?
    Enter subjectivity
    Subjectivity introduces another form of risk
    evaluation bias

    Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, Pearson Education Limited 2012

    Slide 12.13

    How to decide? (continued)

    What if the factor is only partially uncontrollable?


    Consider not making adjustments
    Performance measures provide some information
    about managers performance
    Consideration of adjustments leads to the creation
    of an excuse culture

    Managers are prone to make excuses instead of


    addressing the problems

    Costly in terms of management time involved to


    investigate the claims and determine appropriate
    adjustments

    Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, Pearson Education Limited 2012

    Slide 12.14

    How to decide? (continued)

    If adjustments are made, where they should


    not be made
    Bad decisions; managers fail to consider
    relevant factors in their decision making
    Shareholders lose as managers are given
    undeserved rewards

    Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, Pearson Education Limited 2012

    Slide 12.15

    Summary

    Consider costs and benefits of making


    adjustments
    Benefits exceed costs if:
    Factor is clearly uncontrollable and if the firm
    does not want managers to respond (they have
    no influence)
    Subjectivity can be avoided (or is tolerated)
    In all other cases, use adjustments sparingly

    Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, Pearson Education Limited 2012

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