1. Motivating Behavior in Management Accounting and Control Systems
Chapter 8

2. Management Accounting and Control Systems
Chapter 7 discussed the technical characteristics of a well-designed management accounting and control system
A major role for control systems is to motivate behavior congruent with the desires of the organization since human interests and motivation can vary significantly

3. Major Behavioral Considerations
Embedding the organization’s ethical code of conduct into MACS design
Using a mix of short and long-term qualitative and quantitative performance measures
Empowering employees to be involved in decision making and MACS design
Developing an appropriate incentive system to reward performance

4. Impact of MACS on Behavior
Many managers try to implement new systems without considering the behavioral implications and consequences of a MACS
Negative consequences:
Goal congruence may not occur
Motivation could be low
Employees may be encouraged to engage in dysfunctional behavior

5. Human Resource Model Of Motivation (HRMM)
Contemporary management view of motivation
Based on initiatives to improve the quality of working life and the strong influence of Japanese management practices
Introduces a high level of employee responsibility for and participation in decisions in the work environment
Serves as the basis for the presentation of the four behavioral considerations in MACS design

6. Central Assumptions of HRMM
Organizations operate under a system of beliefs about the values, purpose, and direction of their organization
People find work enjoyable and desire to participate in:
Developing objectives
Making decisions
Attaining goals in their work environment
Individuals are motivated by both financial and nonfinancial means of compensation

7. Central Assumptions of the HRMM
Employees have a great deal of knowledge and information about their jobs, the application of which will improve the way they perform tasks and benefit the organization as a whole
Individuals are highly creative, ethical, and responsible
Employees desire opportunities to effect change in their organizations

8. Ethical Code of Conduct and MACS Design
A set of ethical principles is at the center of many boundary systems
MACS should incorporate the principles of an organization’s code of ethical conduct
MACS that incorporates ethical principles can provide decision makers with guidance as they face ethical dilemmas

9. Pressures Affecting a MACS
Managers are often subject to intense pressures from their job circumstances and from other influential organizational members to suspend their ethical judgment in certain situations
These pressures include the following requests:
to tailor information to favor particular individuals or groups
to falsify reports or test results
for confidential information
to ignore questionable or unethical practices

10. Ethics and Management Accountants
Management accountants are guided by the organization’s code of ethical conduct and the ethical standards of their professional associations
Management accountants often play a significant role in MACS design, which should reflect their professional standards

11. Incorporating Ethics into a MACS Design
To incorporate ethical principles into the design of a MACS, designers might attempt to ensure the following:
That the organization has formulated, implemented, and communicated to all employees a comprehensive code of ethics
That all employees understand the organization’s code of ethics and the boundary systems that constrain behavior
That a system exists to detect and report violations of the organization’s code of ethics

12. Avoiding Ethical Dilemmas
Most organizations attempt to address ethical considerations and avoid ethical dilemmas by developing a code of ethics
Ethical considerations:
Legal rules
Societal norms
Professional memberships
Organizational/group norms
Personal norms
This hierarchy is listed in descending order of authority

13. Ethical Hierarchy
An action that is prohibited by law should be unacceptable by society, by one’s profession, by the organization, and then by each individual
An action that is legally and socially acceptable may be professionally unacceptable and unacceptable to the organization and its employees

14. Dealing With Ethical Conflicts
A decision maker may face an ethical conflict when the individual’s code of ethics sets a higher standard than the organization’s
Organizations that formulate and support specific and unambiguous ethical codes create an environment that reduces ethical conflicts
One step is to maintain a hierarchy of authority

15. Role of Senior Management
A critical variable that can reduce ethical conflicts is the way that the chief executive and other senior managers behave and conduct business
If these individuals demonstrate exemplary behavior, other organizational members will have role models to emulate
Organizations whose leaders evince unethical behavior cannot expect their employees to behave according to high ethical standards

16. Conflicts within a Code of Ethics
When organizations develop a formal code of ethics, they can create the potential for explicit ethical conflicts to arise with the code itself
The conflicts that appear most in practice are those between the organization’s code of ethics and:
The law
Common societal expectations
The individual’s set of personal and professional ethics
Other conflicts relate to personal values and norms of behavior that were acceptable prior to the adoption of the organization’s new code of ethics but that are now in question

17. Conflict Between Individual and Organizational Values(1 of 3)
If the organization’s code of ethics is more stringent than an individual’s code, conflicts may arise, but if adherence to the organization’s ethical code is required and enforced

18. Conflict Between Individual and Organizational Values
Issues may arise when the individual’s personal code of ethics prohibits certain types of behavior that are legal, socially acceptable, professionally acceptable, and acceptable to the organization
Potential for conflict in such situations is heightened when the action that is unacceptable to the individual is desirable to the organization
The organization may require that the person do things that he or she finds unacceptable

19. Conflict with Stated Values
Employees may observe management, even senior management, engaging in unethical behavior
This type of conflict is the most difficult because the organization is misrepresenting its ethical system
The employee is in a position of drawing attention to the problem by being a whistle-blower

20. Conflict with Stated Values
Experts who have studied this problem advise that the individual should determine:
That the facts are correct
That a conflict exists between the organization’s stated ethical policy and the actions of its employees in practice
Whether this conflict is institutional or reflects the decisions and actions of only a small minority of employees
Most experts recommend that the employee work with respected leaders in the organization to change the discrepancy between practiced and stated ethics

21. Conflict with Stated Values
Other potential courses of action include:
Point out the discrepancy to a superior and refuse to act unethically
Point out the discrepancy to a superior and act unethically
Take the discrepancy to a mediator in the organization, if one exists
Go outside the organization to publicly resolve the issue

22. Conflict with Stated Values
Go outside the organization anonymously to resolve the issue
Resign and go public to resolve the issue
Resign and remain silent
Do nothing, hoping that the problem vanishes

23. Conflict with Stated Values
If the organization is serious about its stated code of ethics, it should have an effective ethics control system to ensure and provide evidence that the organization’s stated and practiced ethics are the same, including a means for employees to point out inconsistencies and to protect those employees

24. Effective Ethical Control
To promote ethical decision making, an ethical control system should include the following:
A statement of the organization’s values and code of ethics written in practical terms, with examples that the employees can relate to their individual jobs
A clear statement of the employee’s ethical responsibilities for every job description and a specific review of the employee’s ethical performance as part of every performance review
Adequate training to help employees identify ethical dilemmas in practice and learn how to deal with those they can reasonably expect to face

25. Effective Ethical Control
Evidence that senior management expects members to adhere to its code of ethics, meaning that management must:
Provide a statement of the consequences of violating the organization’s code of ethics
Establish a means of dealing with violations of the organization’s code of ethics promptly, ruthlessly, and consistently according to the statement of consequences
Provide visible support of ethical decision making at every opportunity
Provide a private line of communication (without retribution) from employees directly to the chief executive officer, chief operating officer, head of human resource management, or someone else on the board of directors

26. Effective Ethical Control
Evidence that employees can make ethical decisions or report violations of the organizations stated ethics (be the whistle-blower) without fear of reprisals from superiors, subordinates, or peers
An ongoing internal audit of the efficacy of the organization’s ethical control system
Formal training is part of the process of promoting ethical decision making

27. Motivation
In addition to fostering ethical behavior, a central issue in MACS design is how to motivate appropriate behavior at work
When designing jobs and specific tasks, system designers should consider the following three dimensions of motivation:
Direction
Intensity
Persistence

28. Goal Congruence
Goal congruence - the organization and its employees align their respective goals
The alignment of goals occurs as employees:
Perform their jobs well and are helping to achieve organizational objectives, and
Are attaining their individual goals at the same time

29. Diagnostic Control Systems
Even if goals are aligned, different types of tasks require different levels of skill, precision, responsibility, initiative, and uncertainty
In most situations, managers try to establish systems that they do not have to personally monitor on a regular basis
These are called diagnostic control systems

30. Interactive Control Systems
If there is a large degree of strategic uncertainty, managers spend much more time monitoring the decisions and actions of their subordinates
These are called interactive control systems
At the core of both systems are two common methods of control: task and results control

31. Task Control
Task control is the process of finding ways to control behavior so that a job is completed in a pre-specified manner
Task control can be broken down into two categories:
Preventive control
Monitoring

32. Task Control Task control is most appropriate when:
There are legal requirements to follow specific rules or procedures to protect public safety
Employees handle liquid or other precious assets
The organization can control its environment and eliminate uncertainty and the need for judgment

33. Results Control
Results control methods focus on measuring employee performance against stated objectives
The organization must have clearly defined objectives, communicated them to appropriate organization members, and designed performance measures consistent with the objectives

34. Results Control Results control is most effective when:
Organization members understand the organization’s objectives and their contribution to those objectives
Organization members have the knowledge and skill to respond to changing situations by taking corrective actions and making sound decisions
The performance measurement system is designed to assess individual contributions so that an individual can be motivated to take action and make decisions that reflect their own and the organization’s best interests

35. Need For Multiple Performance Measures
The ways in which organizations measure performance send signals to all employees and stakeholders about what the organization considers as its priorities
Using multiple measures of performance helps employees focus on several dimensions of their jobs rather than just keying in on one dimension

36. Behavior Not Goal-Congruent
Occasionally employees are so motivated to achieve a single goal that they engage in dysfunctional behavior:
Gaming the performance indicator
Data falsification
Smoothing (a form of earnings management)

37. Encouraging The Desired Behavior
Boundary systems give employees a clear understanding of what is considered appropriate and inappropriate behavior
Organizations may also design performance measurement systems that encourage the desired behavior
Use multiple performance measures to reflect the complexities of the work environment

38. Using A Mix Of Performance Measures
MACS designers need to expand their views of the kinds of performance measures to use
Need for measures of quality, speed to market, cycle time, flexibility, complexity, innovation, and productivity
New realities: the movement from “tall” organizations to “flat” organizations

39. MACS Design: Empowering Employees
Empowering employees in MACS design requires two essential elements:
Allowing employees to participate in decision making
Ensuring that employees understand the information they are using and generating

40. Participation In Decision Making
Research has suggested that employees who participate in decision making feel greater morale and job satisfaction
In most industries, people still perform the majority of work and have superior information:
MACS designers should enlist the participation of employees

41. Understanding Information
Empowering employees requires ensuring that they understand the information they use and on which they are evaluated
Employees at all levels must understand the organization’s performance measures and the way they are computed in order to be able to take actions that lead to superior performance
Employees have to be constantly re-educated as the system and its performance measures change

42. Incentive Systems Types of reward systems to motivate employees:
Intrinsic rewards
Extrinsic rewards
Organizations use many systems of financial rewards
Theories of motivation:
Expectancy theory
Agency theory
Goal setting theory

43. Intrinsic Rewards Come from within an individual and reflect:
Satisfaction from doing the job
Growth opportunities the job provides
the nature of the organization and type of work performed
Design jobs and develop a culture that lead employees to derive intrinsic rewards
Not affected by management accounting information

44. Extrinsic Rewards
Any reward that one person provides another to recognize a job well done
Based on assessed performance
Reinforce the notion that employees have distinguished themselves within the organization
Extrinsic rewards may reinforce the perception that wages compensate the employee for a minimally acceptable effort and that the organization must use additional rewards to motivate the employee to provide additional effort

45. Intrinsic v. Extrinsic Rewards
Many compensation experts believe that organizations have not made enough use of intrinsic rewards
Some argue that people who expect to receive a reward for completing a task successfully do not perform as well as those who expect no reward

46. Intrinsic v. Extrinsic Rewards
Most organizations ignore the role of intrinsic rewards in motivation and blindly accept the view that only financial extrinsic rewards motivate employees
Many people believe that financial extrinsic rewards are both necessary and sufficient to motivate superior performance
Both systematic and anecdotal evidence suggest:
Financial extrinsic rewards are not necessary to create effective organizations
Performance rewards do not necessarily create them

47. Intrinsic v. Extrinsic Rewards
Some argue that any incentive compensation program is unacceptable
They suggest that organizations must strive to be excellent to survive in a competitive world
Superior and committed performance is necessary for all employees and is part of the contract of employment and does not merit additional pay
Many organizations rely on extrinsic monetary rewards to motivate performance

48. Incentive Compensation
Incentive compensation reward systems provide monetary (extrinsic) rewards based on measured results
Pay-for-performance systems
Base rewards on achieving or exceeding some measured performance
Require performance measurement systems that gather relevant and reliable performance information
Based on absolute performance, performance relative to some plan, or performance relative to that of some comparable group

49. Absolute Performance Measures of absolute performance include:
The number of acceptable quality units produced
The organization’s results
The organization’s share price performance

50. Relative Performance
Rewards based on relative performance are those tied to the following:
The ability to exceed a performance target level
The amount of a bonus pool
The degree to which performance exceeds the average performance level of a comparable group

51. Effective Performance Measurement
Six attributes must be in place for a measurement system to motivate desired performance
Employees must understand their jobs and the reward system and believe that it measures what they control and contribute to the organization
Designers of the performance measurement system must make a careful choice about whether it measures employees’ inputs or outputs

52. Effective Performance Measurement
The elements of performance that the performance measurement system monitors and rewards should reflect the organization’s critical success factors
The reward system must set clear standards for performance that employees accept
The measurement system must be calibrated so that it can accurately assess performance
When it is critical that employees coordinate decision making and other activities with other employees, the reward system should reward group, rather than individual, performance

53. 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
When the organization has empowered its employees to make decisions, it can use incentive compensation systems to motivate appropriate decision-making behavior

54. Incentive Compensation And Employee Responsibility
The incentive compensation system must focus primarily on outcomes that the employee controls or influences
Employees’ incentive compensation should reflect the nature of their responsibilities in the organization
A mix of rewarding both short and long-term outcomes is consistent with the goals of the balanced scorecard approach

55. Rewarding Outcomes
Incentive compensation schemes tie rewards to the outputs of employee performance rather than to inputs such as their level of effort
Incentive compensation based on outcomes requires that organization members understand and contribute to the organization’s objectives

56. Input-Based Compensation
Rewards may be based on inputs when:
It is impossible to measure outcomes consistently
Outcomes are affected by factors beyond the employee’s control
Outcomes are expensive to measure
Input-based compensation measures the employee’s time, knowledge, and skill level
Many organizations use some form of knowledge-based remuneration

57. Managing Incentive Plans
Considerable evidence indicates that organizations have mismanaged incentive compensation plans, particularly those for senior executives
Experts debate whether compensation systems motivate goal-seeking behavior and whether they are efficient

58. Managing Incentive Plans
Some studies show a positive correlation between executive compensation and shareholder wealth
Other studies report finding no, or even a negative, correlation between organization performance and executive compensation
Many professionals argue that the amounts are excessive and reflect high status rather than performance
The issue of fairness has also surfaced

59. Types Of Incentive Plans
Most common incentive compensation plans: cash bonuses, profit sharing, gainsharing, stock options, performance shares stock, stock appreciation rights, participation units, and employee stock ownership plans
Types of group compensation plans:
Those that rely on internal measures
Those that rely on performance of the organization’s share price in the stock market
Management accountants get involved in the first group

60. Cash Bonus
A cash bonus plan pays cash based on some measured performance
Cash bonuses can be:
Fixed in amount (triggered when measured performance exceeds the target) or proportional to the level of performance relative to the target
Based on individual or group performance
Paid to individuals or groups

61. Profit Sharing
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:
What portion of the organization’s reported profits is available for sharing
The sharing formula
The employees who are eligible to participate in the plan
The formula for each employee’s share

62. Gainsharing
Gainsharing is a system for distributing cash bonuses from a pool when the total amount available is a function of performance relative to some target
Gainsharing is a group incentive that usually:
Provides for the sharing of financial gains in organizational performance
Applies to a group of employees within an organization unit, such as a department or a store
Gainsharing promotes teamwork and participation in decision making

63. Stock Option Plans
A stock option is the right to purchase a unit of the organizations stock at a specified price, called the option price
A common approach to option pricing is to set the option price at about 105% of the stock’s market price at the time the organization issues the stock option

64. Other Stock-Related Plans
Organizations use many other forms of stock-related incentive compensation plans
These plans provide incentive compensation to the participants when the stock price increases
They are designed to motivate employees to act in the long-term interests of the organization by acting so as to increase its market (stock) value