Management Control Systems
Chapter 9:
Financial Performance Targets
Wim Van der Stede
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003
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.
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Types of financial performance targets ...
Model-based (engineered) / historical / negotiated
Internally / externally-derived
Information asymmetry
– 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.
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Budget target difficulty … (1 )
Motivation / Performance
Easy Goal Difficulty Impossible
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Budget target difficulty … (2 )
“theory” (lab experiments):
“Good targets” are about 25-40% achievable.
Probability
Target Performance
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -5-
Budget target difficulty … (3 )
“Business practice” (field research):
Targets are about 80-90% achievable.
Probability
Target Performance
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Budget target difficulty … (4 )
Good vs. lousy management teams
Probability
Target Performance
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Budget target difficulty … (5 )
Low vs. high uncertainty
Probability
Target Performance
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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
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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.
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