* -Behavior in organizations

* -Goal congruence
* -Informal factors that influence goal congruence
* -Formal control systems
* -Types of organizations
* -Functions of the controller
* -Performance measurement
* -Difficulties in implementing performance measurement systems
* -Interactive control
* Management compensation
* Characteristics of incentive compensation plans
* Incentives for business unit manager
* Agency theory.

* UNIT II: Organizational structure and

Management control:
 *
Unit-II
Organization Structure and Mgt. Control
Behavior in Organization: MCSs influence human behavior.
Good MCSs influence behavior in a goal congruent manner, i.e.,
they ensure that individual actions taken to achieve personal
goals also help to achieve the organizations goals.
Behavior in organization by explaining goal congruence,
describing how it is affected by informal actions and by formal
systems. The formal system can be divided into 2 categories:
rules, broadly defined, and systematic methods for planning
and for maintaining control.
Different structures are used to implement strategies in
various types of organizations; an effective MCSs should be
designed to fit the particular structure.
* Senior management wants the organization to attain
organization goal. But the individual member of the
organization have their own personal goals, and they are
not necessarily consistent with those of the organization.
The central purpose of a MCS, then, is to ensure a high
level of what is called Goal Congruence.
* In a goal congruence process, the actions people are led to
take in accordance with their perceived self-interest are
also in the best interest of the organization.

*Goal Congruence
* An adequate control system will at least not encourage
individuals to act against the best interest of the
organization For example, if the system emphasizes cost
reduction and a manager responds reduces costs in his
own unit but not in wrong direction.
* In evaluating any management control practices, the 2
important questions to ask are:
* What action does it motivate people to take in their own
self-interest?
* Are these actions in the best interest of the organization?

*Continued..
* Both formal systems and informal processes influence
human behavior in organization; formal control systems
includes-strategic plans, budgets, and reports, where as
informal processes such as work ethic, management style
and culture, because in order to implement organization
strategies effectively the formal mechanisms must be
consistent with the informal ones.
* Therefore, before discussing the formal system, we will
describe the informal forces, both internal and external,
that play a key role in achieving goals congruence.

* INFORMAL FACTORS THAT INFLUENCE

GOAL CONGRUENCE
* External Factors: External factors are norms of desirable
behavior that exist in the society of which the
organization is a part. These norms are include a set of
attitude, work ethic, their spirit and their pride in doing
a good job.
* Internal Factors
* Culture
* Management Style
* Informal Organization
* Perception and communication

*Factors
* Culture: Organization own culture-beliefs, shared
values, norms of behavior. Cultural norms are extremely
important since they explain why two organization, with
identical formal management control systems, may vary
in terms of actual control. Companies culture usually,
unchanged for many years. Organizational culture is also
influenced strongly by the personality and policies of the
CEO. If the organization is unionized, the rules and
norms accepted by the union also have a major influence
on the organizations culture.

*Internal Factors
* Management Style: Strongest impact on Mgt. control is
management style. Sub-ordinates attitude reflect what they
perceive their superiors attitude to be, and their superiors
attitudes ultimately stem from the CEO. Managers come in all
shapes, some are charismatic and outgoing, others are less
ebullient, some spend much time looking and talking to people,
some are heavily on written reports.
* Perception and Communication: In working toward the goal of
the organization, operating managers must know what these
goals are and what actions they are supposed to take to
achieve them. They receive the information through various
channels formal and informal. Despite this range of channels, it
is not always clear what senior management wants done. The
ultimate object is to achieve common goals of an organization.

*Internal Factors
* Formal Control System further classified into
* (i) MCs (ii) Rules
* Rules: Rules are formal instructions and controls including
standard instructions, job descriptions, standard operating
procedures, manuals and ethical guidelines. Example: Rule
specifies the criteria for extending credit to customers.
Every one has to follow rules until they are modified which
happens infrequently. Rules should never be broken under
any circumstances. Example: Airline pilots must never take
off without permission from the air traffic controls some
specific types of rules are listed below.
* Physical controls
* Manuals
* System Safeguards
* Task control system

*Formal Control System

* (i) Physical controls: Security guards, locked store rooms,
computer passwords etc., may be part of the control structure.
* (ii) Manuals: Manuals in bureaucratic organizations are more
detailed than are those in other organizations. Large
organizations have more manuals and rules than small ones.
Centralized organizations have more than decentralized one.
Manuals are reexamined periodically to ensure that they are
still consistent with the wishes of current senior management.
* (iii) System Safeguards: Various safeguards are built into the
information processing system to ensure that the system is
accurate, and to prevent fraud of every sort. Example: Cross
checking with details, requiring signature for authorization.
* Task Control system: The process of ensuring that specific tasks
are carried out efficiently and effectively. Many of these tasks
are controlled by rules.

*Rules
* A strategic plan implements the organizations goals and
strategies. All available information is used in making this
plan. The strategic plan is converted to an annual budget
that focuses on the planned revenues and expenses for
individual responsibility centres. In responsibility centre
actual results are compared with those in the budget to
determine whether the performance was satisfactory are
not. In case satisfactory announce reward on other hand to
take corrective actions.

*Formal Control Process

* Formal Control Process:

Goals and Other

RULES
Strategies Information
Reward
Feedback

Report
Strategic Responsibility Actual Vs. Performance
Budgeting
Planning Centres Plans

Feed back communication

*Formal Control Process

*A firms strategy has a major influence on its structure. The types of
structure, in turn, influences the design of the organizations
management control systems. Although organizations come in all sizes
and shapes, their structure can be grouped into three categories:
*Functional Structure: Manager is responsible for a specified function
such as production or marketing. Specialists should be able to supervise
workers in the same function, an important advantage for a functional
structure is efficiency. There are several disadvantages there is no
unambiguous way of determining the effectiveness because both
production and marketing manager contributes jointly. In one aspect
both the department has to submit separate report.
* Example: Marketing department to satisfy a customers need for a certain
quantity of product even if it requires overtime but the manufacturing
department may be unwilling to incur. Theoretically, such a dispute would
have to be settled at head quarters.

* Types of Organizations
 CEO

Manufacturing Marketing
Manager Manager
Staff

Manager Region Region

Manager Plant Plant-
Region A B C
Plant-I -2 3

*Functional Structure
* A business unit, also called a division, is responsible for
all the functions involved in producing and marketing a
specified product line. Business unit manager act almost
separate entity. They are responsible for planning and
coordinating the work of the separate function. HQ
reserves certain key prerogatives. It is responsible for
obtaining required funds to the various business units.
HQ also approves budgets and judge the performance of
business unit managers. Head Quarter also establishes
company wide policies. HQ also assist in key areas HR,
Public relations, controller and treasury measures.

*Business Unit Organization

 CEO

Manager
Unit-Y Unit-Z
Unit-X

Manfg.
Plant Pla Manf
Manag Plant Mnfg.
Manager nt g.
er

* Business Unit Organization

* A matrix structure, in which functional units have dual
responsibility. Each unit manager is held responsible for
the profitability. A functional manger may be more
efficient because larger functional units provide the
benefits of economics of scale. The control implications
of various organizations structures should be reviewed
with senior management. It is broader type than the
specialist who manages specific function.

*Matrix Structure
*The person who is responsible for designing and operating the management control
system as the controller. Actually, in many organizations the title of this person is
CEO.

*Functions:
1. Designing and operating information and control system.
2. Preparing financial statements and financial reports for shareholders and other
external parties.
3. Preparing and analyzing performance reports, interpreting these reports for
managers, and analyzing program and budge proposals from various segments of
the company and consolidating them into an overall annual budget.
4. Supervising internal audit and accounting control procedures to ensure the
validity of information, establishing adequate safeguards against theft and brand
and performing operational audit.
5. Developing personnel in the controller organization and participating in the
education of management personnel in matters relating to the controller
function.
Currently, companies typically have a Chief information officer (CIO) who carries out
this responsibility. In some companies, the CIO reports to the chief financial officer,
in others, the CIO reports directly to senior management.

* Functions of the controller

* Performance measurement comparison of actual
performance with budgeted financial performance, this one
type of performance measurement. The main objective is to
help implement strategy. A performance measurement
system is simply a mechanism that improves the likelihood
the organization will implement its strategy successfully.
The balanced scorecard is an example of a performance
measurement system. According to proponents of this
approach, business units should be assigned goals and then
measured from the following 4 perspectives.

* Performance Measurement
Financial (Profit margins, return on assets, cash flow)
Customer (Market share, customer satisfaction index)
Internal business (Employee retention, cycle time
reduction index)
Innovation and learning (% of sales from new products)
It is a tool that helps the companys focus, improves
communication, sets organizational objectives and provides
feed back on strategy.

*Continued..
* Unless the following problems are suitably dealt with, they could limit the usefulness
of the PMS.
I. Poor correlation b/w financial measures and results: There is no guarantee that
future profitability will follow target achievements in any non-financial area.
Example: Whirlpool targeted ROE of 18% b/w 1991 and 95, but it is not achieve an
ROE above 13.9% this was less than 18% but higher than previous year 12.1%.
II. Fixation of financial results: Poorly designed incentive programs create additional
pressure. Senior managers most often are compensated for financial performance.
This can disrupt congruence, causing managers to be more concerned about
financial measures than any other measure.
III. Measures are not updated: Many companies do not have a formal mechanism for
updating the measures to align with changes in strategies. This is one of the
difficulty in implementing PMS.
IV. Measurement overload: There are too many measures, the manager may risk losing
focus in trying to do too many things at once.
V. Difficulty in establishing trade-offs: Some companies combine financial and non-
financial measures into a single report and give weights to the individual measures,
it becomes difficult to establish trade off b/w financial and non-financial measures.

* Difficulties in implementing PMS

* The primary role of management controls is to help execute
strategies. Under this view, chosen strategy defines the critical
success factors which become the focal point for the design and
operation of control system. The end result is the strategy
successful implementation. In industries that are subject to very
rapid environmental changes, management control information
can also provide the basis for thinking about new strategies. It is
called interactive control. The main objective of interactive
control is to facilitate the creation of a learning organization.
Learning organization refers to the ability of an organizations
employees to learn to cope with environmental changes on an on
going basis.
* Critical success factors means; what are the factors customer
preference technology competitors, lifestyles.

*Interactive Control:
* Interactive Control Chosen strategy

Critical success factor

Design and operation of MCS

*Continued.
I. A subject of management control information that has a
bearing on the strategic uncertainties facing the business
becomes the focal point.
II. Senior executives take such information seriously
III. Managers at all levels of the organization focus attention on
the information produced by the system.
IV. Superior, subordinates and peers meet face-to-face to
interpret and discuss the implications of the information for
future strategic initiatives.
V. The face-to-face meetings take the form of debate and
challenge of the underlying data, assumptions and
appropriate actions.

*Characteristics:
* Every organization has goals. An important role of MCS is
to motivate organizational members to attain hose
goals. An organization goals lies in the way the
organizations incentives relate to the individuals goals.
People are influenced by both positive and negative
incentives. A positive incentive, or reward, is an
outcome that increases satisfaction of in individual
needs. Conversely, a negative incentive, or
punishment, is an outcome that decreases satisfaction
of those needs.

*Management Compensation
A managers total compensation package consists of three
components (1) salary (2) benefits (Retirement and health care,
but also perquisites of various types) and (3) incentive
compensation. Managers typically receive higher compensation in
large compensation in large compensation in large compensation
in large companies than in small firms. Most corporate bylaws and
securities regulations require incentive compensation plans and
revisions of existing plans to be approved by the shareholders.
Incentive compensation plans can be divided into short-term and
long-term plans. Short-term incentive plans are based on
performance in the current year. Long-term plans tie
compensation to longer-term accomplishments and are related to
the price of the companys common stock.

* Characteristics of incentive
compensation plan
* The total amount of bonus that can be paid to a qualified group
of employees in a given year is called the bonus pool. Payment
of bonus depends on profitability in the current year.
* Carryovers: Instead of paying the total amount in the bonus
pool, the plan may provide for an annual carryover of a part of
the amount determined by the bonus formula. Each year a
committee of the Board of Directors decides how much to add
to the carryover, or how much of the accumulated carryover to
used if the bonuses would otherwise be too low.
* Deferred Compensation: Under this system, executives receive
only 1/5 of their bonus in the year in which it was earned. The
remaining 4/5 are paid out equally over the next 4 years

* Short-term Incentive Plans

* Several types of plans, has to be used in different times.
I. Stock options: It is the right to buy a number of shares of stock at, or after,
a given date in the future at a agreed price at the time the option is granted.
II. Phantom shares: A phantom stock plan awards managers a number of shares
for book keeping purposes only. At the end of a specified period (say, 5 years)
the executive is entitled to receive an award equal to the appreciation in the
market value of the stock since the date of award. This award may be in
cash, in shares of stock, or in both.
III. Stock Appreciation Rights: It is a right to receive cash payments based on
the increase in the stocks value from the time of the award until a specified
future date.
IV. Performance Shares: A performance share plan awards a specified number
of share od stock to a manager when specific long-term goals have been met.
V. Performance Units: A performance unit plan, a cash bonus is paid when
specific long-term targets are attained. This plan thus combines aspects of
stock appreciation rights and performance shares. It is especially useful in
companies with little or no publicly traded stock. Long term targets must be
carefully established for this plan to succeed.

* Long-term Incentive Plans

* A wide array of options exists in developing an incentive
compensation package for business unit managers.
* Types of Incentives: Some incentives are financial, other are
psychological and social. Financial incentives include salary
increases, bonuses and perquisites (automobiles, vacation trips,
club memberships and so on). Psychological and social incentives
include promotion possibilities, increased responsibilities, more
autonomy, a better geographical location and recognition.
* Size of bonus relative to salary: There are two schools of
thought, one is fixed (salary and fringe benefits) and variable
incentive bonus rewards in managers total compensation.
* I School --- Fixed pay system Recruitment good people, pay
them well
* II School --- Performance based pay; Recruit good people, expect
them to perform well.

* Incentives for Business Unit Manager

*Cut off levels: A bonus plan may have upper and lower cut off levels.
An upper cut off is the level of performance at which a maximum
bonus is reached. A lower cut off is the level below which no bonus
awards will be made.
*Bonus basis: A business unit managers incentive bonus could be
based on total corporate profits or on business unit profits or some
mix of the two.
*Performance Criteria: The incentive bonus for business unit managers
is to decide which criteria shall be used to determine the bonus.
a. Financial Criteria: If the business unit is profit/ Investment/ Revenue
involved in choosing performance criteria.
b. Adjustments for uncontrollable factors: Adjust 2 kinds of influences,
one adjustment remove expenses that result from decisions made by
executives above the business unit level. Another adjustment
eliminates the effect of losses caused by act of nature (fires, earth
quakes, floods) and accidents not cause by the managers negligence.

* Continued.
* Benefits and short comings of short-terms financial
targets: Allow bonus to achieving annual financial
targets within short period of time.
* Bonus determination approach: A bonus award for a
business nit manager can be determined by using a
strict formula, such as a % of the business units
operating profit, or by a purely subjective assessment
by the managers superior, or by some combination of
the two.

*Continued.
* Agency theory explores how contracts and incentives
can be written to motivate individuals to achieve
goal congruence. An agency relationship exists
whenever one party (the principal) hires another
party (the agent) to perform some service and, in so
doing, delegates decision making authority to the
agent. In a corporation., shareholders are principals
and CEO is their agent. The shareholders hire the
CEO and expect that he will act in their interest. At
a lower level CEO is the principal and business unit
managers are the agents.

*Agency Theory
I. Divergent objective of principals and agents: All individuals act in their own
self-interest principals are assumed to be interested only in the financial
returns where as agents are assumed to receive satisfaction not only from
financial compensation but also others.
II. Non observability: Shareholders are not in a position to monitor the CEOs
activities daily likewise, the CEOs is not in a position to monitor the daily
activities of business unit managers.
Control Mechanism: Agency theorists can say that; they can control in two ways:
i. Monitoring: The principal can design control systems that monitors the
agents actions. Example: Audited Financial Statements.
ii. Incentives contracting: A principal may attempt establishing appropriate
incentive contracts. Based on performance of an agent toward goal
congruence awarding incentive plans. Ex: Salary +Bonus.
Business unit managers and Accounting Based Incentives: For motivating
manager of business unit through firms stock price it is very difficult. For this
reason, the CEOs incentive contracts on accounting based i.e., bonus on business
unit net income.

*Continued
*A Critique: It was invented in the 1960s and
since then has been written about extensively in
academic journals. It implies that managers in
non-profit organization and government
organization do not accept this implication. This
theory is helpful for how incentive
compensation influences the motivation of
managers.

*Criticism