Management And Accounting Web

Atkinson, A. A., R. D. Banker, R. S. Kaplan and S. M. Young. 2001. Management Accounting: 3rd edition. Upper Saddle River: NJ: Prentice Hall.

Chapter 10
Motivating Behavior in Management Accounting and Control Systems

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

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1. Introduction

This chapter includes five main sections related to the behavioral aspects of control systems. The first section is fairly short, but provides a discussion of the important underlying management philosophies related to human behavior. The second section is devoted to ethical issues such as the organization's code of ethical conduct, the hierarchy of ethical principles, the elements of an ethical control system and the dimensions of motivation. The third section provides an introduction to the balanced scorecard concept including the four perspectives that are addressed when developing an organization's scorecard. Section four includes a brief discussion related to employee empowerment and the control system design. The last section includes several sub-sections related to various types of incentive systems and some of the controversial issues involved in the human behavior and motivation literature.

Four Major Behavioral Considerations in Control System Design

These four items from the previous chapter are included in the introduction.

1. Embedding the organization's ethical code of conduct.

2. Using a mix of balanced measurements, i.e., balance short term and long term, quantitative and qualitative measurements etc.

3. Empowering employees.

4. Developing an incentive system.

2. Control Systems and Human Resource Models

Goal congruence is a key concept underlying the development of control systems. Goal congruence occurs when the goals of managers and employees are consistent with the goals of the organization. In this section, ABKY compare the scientific management model of human behavior with the human resource model. McGregor discussed these models over forty years ago and labeled them Theory X and Theory Y. The scientific management model follows the lazy man theory McGregor referred to as theory X. The human resource model fits McGregor's theory Y. These models are summarized in the table below. The main point to grasp from this section is that these models provide the underlying assumptions related to how control systems are designed. The attitudes of most managers probably fall somewhere between the two extremes. Issues related to human behavior and motivation are very controversial. Blake and Moulton's Managerial Grid is also applicable to this section.

Summary of McGregor's Theory X and Theory Y*
Management Objectives,
Attitudes and Assumptions
Theory X Theory Y
Overall objective of management. Organizing resources to produce economic results. Organizing resources to produce economic results.
Management attitude towards employees. Must direct their efforts, motivate, control and modify their behavior. Without active intervention, employees will be indifferent towards the goals of the organization. Thus, they must be rewarded and punished. Emphasize external control. Provide conditions and methods for people to achieve their own goals directed towards organization objectives. Employees are not by nature indifferent to the organization's needs. They become indifferent as a result of experience. Emphasize internal self control.
Managements assumptions about employee characteristics and behavior. Employees are lazy, lack ambition, dislike responsibility and prefer to be led. They are self centered, indifferent to the needs of others, resistant to change, gullible and not very bright. Employees have needs based on Maslow's hierarchy: Physiological - rest, exercise and shelter. Safety - protection from the elements. Social - friendship, belonging and love. Ego - self esteem, status and recognition. Self fulfillment - realizing potential. Behavioral problems are caused by need deprivation.**
Management attitude towards groups. Groups are a threat to management and should be discouraged. Groupiness can be beneficial to the organization.

* McGregor, D. M. 1957. The human side of enterprise. Management Review (November) and McGregor, D. M. 1960. The Human Side of Enterprise: 25th Anniversary Printing. McGraw-Hill. ** Employee indifference to the needs of the organization, hostility and refusal to accept responsibility are not indications of inherent human nature, but symptoms of illness caused by the deprivation of social and egoistic needs. A satisfied need is not a motivator. Once a person fills a need, it cannot be used to motivate that individual. However, a person deprived of some needs may attempt to substitute more of one for the lack of another. For example, although money cannot satisfy many higher level needs, in many organizations, demanding more money may be the only available means of attempting to do so.

3. Ethical Issues

Developing a code of ethics is important to help motivate ethical behavior. ABKY discussed beliefs systems and boundary systems in Chapter 1. These combined systems or concepts provide a comprehensive code of behavior for employees. As Simons points out, effective control in "an age of empowerment "also requires diagnostic control systems to insure that employees follow the code of conduct. (Simons Summary).

A Hierarchy of Ethical Principles

ABKY discuss a hierarchy of ethical principles that provide general guidelines for understanding and addressing ethical problems. These include:

1. Legal rules.
2. Societal norms.
3. Professional memberships. (Links to the IMA, AICPA and other ethics sites).
4. Organizational or group norms.
5. Personal norms.

Problems arise where an employee's personal code of ethics conflicts with the other levels within the hierarchy. The In-Practice note at the top of page 399 makes an interesting point. According to the note, 55% of the executives surveyed admitted cheating at golf. The point: Golf cheats and job cheats are highly correlated.

A Whistle-Blower's Choices

ABKY list and discuss nine choices for a whistle-blower on pages 399-400. These include:

1. Point out the discrepancy to your supervisor and refuse to act unethically.

2. Point out the discrepancy to your supervisor and act unethically.

3. Take the discrepancy to a mediator in the organization, if one exist.

4. Work with respected leaders in the company to change the discrepancy between practiced and stated ethics.

5. Go outside the company to publically resolve the issue.

6. Go outside the company anonymously to resolve the issue.

7. Resign and go public to resolve the issue.

8. Resign and remain silent.

9. Do nothing, and hope that the problem will dissolve.

They point out that the control system should include a way for employees to report inconsistent ethical behavior without fear of retribution. They suggest the internal audit function as a possible answer. (See MAAW's section on Whistleblowing).

Elements of Effective Ethical Control

1. A statement of the organization's values and code of ethics.

2. A statement of the employee's ethical responsibilities.

3. Training in identifying and dealing with ethical issues.

4. Actions and communications from senior management that:

a. state the consequences of violating the ethical code,
b. provides a means of dealing with violations,
c. includes visible support of ethical behavior and
d. provides a line of communication to top management.

Steps for Resolving Ethical Issues*

A model for resolving ethical issues is presented in Exhibit 10-1 and includes a discussion of the following steps:

1. Determine the facts - what, who, where, when and how.
2. Define the ethical issues.
3. Identify the principles, rules and values involved.
4. List the alternatives.
5. Compare alternatives.
6. Assess consequences of choosing alternatives.
7. Make the decision.

*From May, W. W., Editor. 1990. Ethics in the Accounting Curriculum: Cases and Readings. American Accounting Association: 1.

4. Dimensions of Motivation

This sub-section (page 402) provides three dimensions of motivation:

1. Direction, or focus.
2. Intensity, or effort.
3. Persistence, or duration.

Controls to guide direction include:

1. Employee self control.

2. Task control. Follow standard procedures. Applicable when there are legal requirements or precious assets involved, and there is no need for judgment. Two types of task controls: a. Preventive control. b. Monitoring, or surveillance as with croupiers (dealers) in gambling casinos.

3. Results control. Applicable when employees understand the objectives, have the necessary knowledge, and individual contributions can be identified.

5. The Balanced Scorecard

Using a single measurement to motivate and guide performance can create several problems including conflicts between workers, gaming to enhance the performance indicator, and data falsification. Although boundary systems provide a partial solution for these problems, ABKY recommend the balanced scorecard approach as a more effective way to guide behavior. Their discussion on page 407 compares the older traditional organizational structure and control system design to the new organizational structure and control system.

Concept Traditional Organization New Organization
Organizational Structure
Tall or vertical. Flat or horizontal.
Improvement focus Cost minimization. Reengineering - systems redesign.
(See the Hammer Summary).
Focus Individuals and functions. Groups of cross functional teams.
Measurements and focus Quantitative financial - cost
profit, sales, ROI, etc.
Quantitative financial and non-financial and qualitative - yield, cycle time, schedule attainment, defects, customer retention and satisfaction, employee morale etc.

Balanced Scorecard Perspectives

As indicated in Exhibit 10-3 (p. 409) the balanced scorecard includes four perspectives that help a company translate its strategy into operational terms. These include:

1. Financial - measured by income and return on investment.

2. Internal Business Process - measured by critical factors such as cycle time, yield, schedule attainment, etc.

3. Learning and Growth - sources include people, systems and procedures - measured by level of skills, employee satisfaction, employee retention etc.

4. Customer - measured by customer surveys, customer retention, market share.

6. Employee Empowerment

Employee empowerment involves two elements:

1. Delegating the authority to employees to make decisions, and
2. Employee education to support the decisions.

Employee empowerment benefits may include:

1. Higher employee morale and job satisfaction.
2. Increased productivity.
3. Increased potential for improvement.

7. Incentive Systems

Intrinsic and Extrinsic Rewards

Intrinsic rewards come from within the individual and reflect "joy in work" to use Deming's term. The idea that employees derive pleasure from work is consistent with McGregor's Theory Y concept.

Extrinsic rewards are frequently in monetary terms such as bonuses, but can also be non-monetary such as recognition, employee of the month etc.

Controversy Over Pay as a Motivator

The literature on compensation systems is very controversial. Some researchers have questioned the idea that pay is a motivator. Herzberg, Kohn and Deming provide some notable examples in this area.

Herzberg identified a number of myths related to motivation and developed a motivation-hygiene theory. Herzberg's research findings support the view that factors involved in producing job satisfaction (and motivation) are different from the factors that lead to job dissatisfaction (hygiene). Intrinsic factors (e.g., job enrichment) motivate people while extrinsic factors (e.g., salary, bonuses) are mainly related to hygiene or dissatisfaction avoidance (See Summary).

Kohn argues that incentive plans cannot work and provides six reasons for the failure of reward systems: 1. Pay is not a motivator. 2. Rewards punish. 3. Rewards destroy cooperation. 4. Rewards ignore the reasons for problems and the possible causes of improvement. 5. Rewards discourage creativity and risk-taking. 6. Rewards undermine interest in work. (See Summary).

Deming argued that pay is not a motivator and placed most pay related schemes in the category of deadly diseases, e.g., employee annual performance reviews, ranking employees, management by objectives and merit pay. Deming argued that most of the variation in any system is caused by the system, rather than the people working in the system. Ranking people, simply ranks the effects of the system on to the people. (Deming's perspective on the Effects of Ranking people) and (MAAW's section on Deming).

(Some other article summaries related to motivation include: Amabile, Katzenbach & Santamaria and Levinson).

ABKY point out that most organizations ignore the role of intrinsic rewards and rely on extrinsic monetary rewards to motivate performance (p. 413). It is possible however, that for most people, the absolute amount of money is not the motivator, but instead people respond to how much money they earn relative to others. One major problem with pay schemes and rewards is that they tend to promote competition between employees rather than cooperation and teamwork.

Incentive Compensation

Pay-for-performance can be based on absolute measures or relative measures.

Absolute measurement schemes include piece-rate systems and pay based on the organization's results such as profitability, stock share price or other performance.

Relative measurement schemes include rewards for meeting a target, or provide a percentage of a bonus pool, or are based on performance in relation to an average.

Six Attributes of Measurement Systems

1. Employees must understand the system and believe it measures what they control.

2. The system must be based on inputs or outputs depending on which is applicable. Inputs are applicable when the employee has little control over output, or outputs are impossible to measure, or too expensive to measure.

3. Performance measurements should be balanced to reflect the organization's critical success factors.

4. The system must have clear standards of performance.

5. The system must establish a clear relationship between performance and outcome.

6. When cooperation is critical, the system should reward group performance, rather than individual performance. Cooperation is needed when there is interdependence.

Incentive Compensation Plans

Incentive compensation plans are based on internal measures, or an external measure of the company's stock price. Incentive plans include:

1. Cash Bonuses - rewards based on some measure of performance that do not become a part of the employee's base pay.

2. Profit Sharing Plans - based on a percentage of a profit measurement such as residual income, i.e., income less a minimum based on the cost of capital.

3. Gain Sharing Plans - are group incentive plans such as:

Improshare - based on productivity increases indicated by the direct labor efficiency variance, i.e., (actual hours - standard hours) multiplied by the standard labor rate.

Scanlon Plan - Amount added to bonus pool = (Value of production)(Base ratio) - Actual payroll costs where the base ratio = Payroll cost ÷ Value produced

Rucker Plan - Based on the Rucker standard = Payroll costs ÷ Production value where production value = net sales - inventory change - materials & supplies

4. Stock Options - the right to purchase stock at a specified price usually above the current price.

For more on gain sharing see Imberman, W. 1995. Is gain sharing the wave of the future? Management Accounting (November): 35-39. (Summary).

8. Questions

1. What are the four major behavioral considerations in MACS design? (See the Introduction above).

2. What is the scientific management view of motivation? (See item 2 above).

3. What is the human relations movement view of motivation? (See item 2 above).

4. What is the human resources model view of motivation? (See item 2 above). (The Caplan Summary is also related to questions 2-4).

5. What are the four requirements of ethical conduct by which certified management accountants (CMAs) have to abide? (See the ethics links page).

6. What are some choices that individuals can make when ethical conflicts arise? (See item 3b above).

7. What is an ethical control system, and what are its key elements? (See item 3c above).

8. What are the three key dimensions of motivation? (See item 4 above).

9. What is goal congruence? (See item 2 above).

10. How does task control differ from results control? (See item 4 above).

11. List and explain the two categories in task control. (See item 4 above).

12. List three quantitative financial measures of performance in a manufacturing organization of your choice. (See table above).

13. List three quantitative financial measures of performance in a service organization of your choice. (See table above).

14. List three quantitative nonfinancial measures of performance in a manufacturing organization of your choice. (See table above and MAAW's Textbook Chapter 8).

15. List three quantitative nonfinancial measures of performance in a service organization of your choice.

16. List three qualitative measures of performance.

17. What is gaming? (See the Collingwood Summary).

18. What is data falsification?

19. What is a balanced scorecard? (See item 5 above).

20. What are the four measurement perspectives in the balance scorecard? (See perspectives under item 5 above).

21. What are two essential elements in employee empowerment? (See item 6 above).

22. What is an intrinsic reward? (See item 7 above and the see Chapter 6 in the Deming Summary).

23. What is an extrinsic reward? (See item 7 above).

24. What is incentive compensation? (Look under item 7 above).

25. What are six attributes of effective performance measurement systems? (See item 7b above).

26. What type of organization is best suited to incentive compensation? (See the Kohn Summary).

27. What is a cash bonus? (See item 7c above).

28. What is profit sharing? (See item 7c above).

29. What is gain sharing? (See item 7c above).

30. What is a stock option plan? (See item 7c above).

Additional Questions:

1. Is there a difference between ethical problems and systems problems? If so, what is the difference?

2. Can the problem of unethical behavior be solved with the proposed ethical systems outlined in this chapter? Discuss the issues. (See item 3c above, and the summaries of Simons, Bazerman, Loewenstein & Moore, and Collingwood). (Some other article summaries related to behavioral problems (e.g., gaming, earnings management etc.) include Healy & Wahlen and Dechow & Skinner).

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