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CH13-Using Financial Results Controls in The Presence of Uncontrollable Factors

The document discusses how to hold managers accountable for financial results in the presence of uncontrollable factors. It explains that managers should only be evaluated on factors they can control and notes many important measures have uncontrollable elements. It also describes different types of uncontrollable factors like economic conditions, acts of nature, and interdependencies between organizational units. The document outlines several methods to control for the distorting effects of uncontrollables, such as variance analysis, flexible standards, relative performance evaluations, and subjective evaluations.

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Tantri Ervianti
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© © All Rights Reserved
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83 views

CH13-Using Financial Results Controls in The Presence of Uncontrollable Factors

The document discusses how to hold managers accountable for financial results in the presence of uncontrollable factors. It explains that managers should only be evaluated on factors they can control and notes many important measures have uncontrollable elements. It also describes different types of uncontrollable factors like economic conditions, acts of nature, and interdependencies between organizational units. The document outlines several methods to control for the distorting effects of uncontrollables, such as variance analysis, flexible standards, relative performance evaluations, and subjective evaluations.

Uploaded by

Tantri Ervianti
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Management Control Systems

Chapter 13: Using Financial Results Controls


in the Presence of Uncontrollable Factors

Wim Van der Stede

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003
Controllability principle ...
 Employees should be held accountable only
for what they can control

– They should not be penalized for bad luck,


[nor should they be given rewards for mere
good luck (windfall gains)].

» But, adjustments for uncontrollables are


usually asymmetric.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -2-
Controllability principle ...
 Many important result measures at managerial
levels are only partially controllable.

– But, managers can sometimes take actions


to react to uncontrollable factors and have a
positive influence on results.

– Responses to unforeseen, uncontrollable


events are a key part of being a manager.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -3-
Double rationale …
 Hold managers accountable for what they can
control ...
– Employees are risk averse COST
» When responsible for uncontrollable factors, employees
bear more risk which must be rewarded (risk premium).

 Hold managers accountable for the line items


you want them to pay attention to ...
» It empowers them to influence the behaviors of the BENEFIT
people with direct control (e.g., central managers in
charge of corporate service departments).

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -4-
Types of uncontrollable factors ...
 Economic and competitive factors

– Impact on demand/prices of products/services


and on the cost of doing business.
» Business cycles, competitor actions, changing
customer tastes, changing laws and regulations,
foreign exchange rates, supply and demand for
raw materials, labor, and capital, etc.

– Managers can usually respond to these factors.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -5-
Types of uncontrollable factors ...
 Acts of nature (usually totally uncontrollable)
» Earthquakes, floods, riots, political unrest,
war, fires, etc.

 Interdependence among organizational units


» Pooled interdependencies (e.g., shared
corporate services)
» Sequential / reciprocal interdependencies
(use transfer prices).

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -6-
Controlling for distorting effects ...
 Before the measurement period

– Insurance

– Define the results measures to include only those


items employees can control or at least significantly
influence.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -7-
Controlling for distorting effects ...
 After the measurement period
(but before rewards are assigned)

– Objective methods
» Variance analysis
» Flexible performance standards
» Relative performance evaluations

– Subjective performance evaluations

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -8-
Variance analysis ...
 Actual results vs. predetermined standards
 Two purposes:

– Segregate controllable from uncontrollable


variances
» e.g., industry volume variances

– Determine whom should be held accountable


for the controllable variances.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -9-
Other objective methods ...
 Flexible performance standards
– Re-computation of the performance that employees
are expected to achieve given the actual conditions
faced during the measurement period;
– Scenario plans (best and worst case);
– Regular updates of the performance standards to
reduce forecasting error, and hence, manager’s
exposure to un-controllable risk

– Expensive!?

 Relative performance evaluations (RPE)

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 10 -
Subjective performance evaluations ...
 A “judgement” is made as to whether the results
generated reflect good or bad performance ...

– Bias + risk of being perceived as unfair;


– Employees may not understand the evaluations,
or trust them, even if they are fair;
– Excuse culture + “politicking”;
– Expensive in management time.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 11 -

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