1. Management Control Systems
Chapter 9: Financial Performance Targets
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003

2. Financial results controls ...
Three core elements:
Financial responsibility centers
The apportioning of accountability for financial results within the organization.
Formal management processes
Planning & budgeting to define performance expectations and standards for evaluating performance.
Motivational contracts
To define the links between results and various organizational incentives.

3. Types of financial performance targets ...
Model-based (engineered) / historical / negotiated
Internally / externally-derived
Target costing
Benchmarking
Best-in-industry / best-in-class
Unilateral / cooperative
Fixed / Flexible
Should managers be held accountable for achieving their plans regardless of the business conditions they face?
Relative performance targets.
Information asymmetry

4. Motivation / Performance
Budget target difficulty … (1)
Goal Difficulty
Easy
Impossible
Motivation / Performance

5. Budget target difficulty … (2)
“theory” (lab experiments):
“Good targets” are about 25-40% achievable.
Target
Performance
Probability

6. Budget target difficulty … (3)
“Business practice” (field research):
Targets are about 80-90% achievable.
Target
Performance
Probability

7. Challenging but achievable...
To minimize dysfunctional management actions
Myopic behavior, data manipulation
To increase manager’s commitment to budget targets
To reduce the cost of organizational interventions
Management-by-exception
To protect against the cost of optimistic revenue projections
Over-commitment of resources
To create a “winning” atmosphere and positive attitude

8. Budget 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 constraints
lower-level insights about business potentials and risks.
But, … slack, bias, conservatism, lack of budgeting experience.