2Financial results controls ... Three core elements:Financial responsibility centersThe apportioning of accountability for financial results within the organization.Formal management processesPlanning & budgeting to define performance expectations and standards for evaluating performance.Motivational contractsTo define the links between results and various organizational incentives.
3Types of financial performance targets ... Model-based (engineered) / historical / negotiatedInternally / externally-derivedTarget costingBenchmarkingBest-in-industry / best-in-classUnilateral / cooperativeFixed / FlexibleShould managers be held accountable for achieving their plans regardless of the business conditions they face?Relative performance targets.Information asymmetry
5Budget target difficulty … (2) “theory” (lab experiments):“Good targets” are about 25-40% achievable.TargetPerformanceProbability
6Budget target difficulty … (3) “Business practice” (field research):Targets are about 80-90% achievable.TargetPerformanceProbability
7Challenging but achievable... To minimize dysfunctional management actionsMyopic behavior, data manipulationTo increase manager’s commitment to budget targetsTo reduce the cost of organizational interventionsManagement-by-exceptionTo protect against the cost of optimistic revenue projectionsOver-commitment of resourcesTo create a “winning” atmosphere and positive attitude
8Budget participation ... Top-down / bottom-up budgeting The budgetee is both involved and has influence over setting the budget.Leads to better acceptance of budget targets, and hence, commitment to achieve them.Is an effective way of information sharing:Corporate priorities and constraintslower-level insights about business potentials and risks.But, … slack, bias, conservatism, lack of budgeting experience.