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Management control systems performance measurement evaluation and incentives 4th by merchant Management control systems performance measurement evaluation and incentives 4th by merchant Management control systems performance measurement evaluation and incentives 4th by merchant Management control systems performance measurement evaluation and incentives 4th by merchant Management control systems performance measurement evaluation and incentives 4th by merchant Management control systems performance measurement evaluation and incentives 4th by merchant
MANAGEMENT CONTROL SYSTEMS Performance Measurement, Evaluation and Incentives Kenneth A Merchant & Wim A Van der Stede Fourth Edition MANAGEMENT CONTROL SYSTEMS At Pearson, we have a simple mission: to help people make more of their lives through learning We combine innovative learning technology with trusted content and educational expertise to provide engaging and effective learning experiences that serve people wherever and whenever they are learning From classroom to boardroom, our curriculum materials, digital learning tools and testing programmes help to educate millions of people worldwide – more than any other private enterprise Every day our work helps learning flourish, and wherever learning flourishes, so people To learn more, please visit us at www.pearson.com/uk MANAGEMENT CONTROL SYSTEMS Performance Measurement, Evaluation, and Incentives Kenneth A Merchant University of Southern California Wim A Van der Stede London School of Economics Fourth edition Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong Tokyo • Seoul • Taipei • New Delhi • Cape Town • Sao Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan PEARSON EDUCATION LIMITED Edinburgh Gate Harlow CM20 2JE United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk First published 2003 (print) Second edition published 2007 (print) Third edition published 2012 (print and electronic) Fourth edition published 2017 (print and electronic) © Pearson Education Limited 2003, 2007 (print) © Pearson Education Limited 2012, 2017 (print and electronic) The rights of Kenneth A Merchant and Wim A Van der Stede to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988 The print publication is protected by copyright Prior to any prohibited reproduction, storage in a retrieval system, distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be obtained from the Copyright Licensing Agency Ltd, Barnard’s Inn, 86 Fetter Lane, London EC4A 1EN The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the terms and conditions under which it was purchased, or as strictly permitted by applicable copyright law Any unauthorised distribution or use of this text may be a direct infringement of the authors’ and the publisher’s rights and those responsible may be liable in law accordingly Pearson Education is not responsible for the content of third-party internet sites ISBN: 978-1-292-11055-4 (print) 978-1-292-11058-5 (PDF) 978-1-292-18187-5 (ePub) British Library Cataloguing-in-Publication Data A catalogue record for the print edition is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Merchant, Kenneth A., author | Van der Stede, Wim A., author Title: Management control systems: performance measurement, evaluation and incentives / Kenneth A Merchant, University of Southern California, Wim A Van der Stede, London School of Economics Description: Fourth Edition | New York: Pearson, [2017] | Revised edition of the authors’ Management control systems, 2012 Identifiers: LCCN 2016053625| ISBN 9781292110554 (print) | ISBN 9781292110585 (pdf) | ISBN 9781292181875 (epub) Subjects: LCSH: Industrial management | Cost control | Managerial accounting | Performance—Measurement | Industrial management—Case studies | Cost control—Case studies | Managerial accounting—Case studies Classification: LCC HD31 M3972 2017 | DDC 658—dc23 LC record available at https://lccn.loc.gov/2016053625 10 21 20 19 18 17 Print edition typeset in 9/12, Charter ITC Std Regular by iEnergizer Aptara® Ltd Printed by Ashford Colour Press Ltd, Gosport NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION To our families Gail, Abbidee, Madelyn (KM) Ashley, Emma, Erin (WVDS) This page intentionally left blank BRIEF CONTENTS Preface xiii 11 Remedies to the Myopia Problem 448 Acknowledgements xvi 12 Using Financial Results Controls in the Presence of Uncontrollable Factors 517 SECTION I The Control Function of Management Management and Control SECTION II Management Control Alternatives and Their Effects Results Controls 33 Action, Personnel, and Cultural Controls 86 Control System Tightness 128 Control System Costs 173 Designing and Evaluating Management Control Systems 221 SECTION III Financial Results Control Systems Financial Responsibility Centers 261 Planning and Budgeting 297 Incentive Systems 353 SECTION V Corporate Governance, Important Control-Related Roles, and Ethics 13 Corporate Governance and Boards of Directors 573 14 Controllers and Auditors 629 15 Management Control-Related Ethical Issues 677 SECTION VI Management Control When Financial Results Are Not the Primary Consideration 16 Management Control in Not-for-profit Organizations 721 Index 761 SECTION IV Performance Measurement Issues and Their Effects 10 Financial Performance Measures and Their Effects 397 vii This page intentionally left blank CONTENTS Preface Acknowledgements xiii xvi SECTION I The Control Function of Management Management and Control Management and control Causes of management control problems Characteristics of good management control Control problem avoidance Control alternatives Outline of this text Notes Leo’s Four-Plex Theater Wong’s Pharmacy Private Fitness, Inc Atlanta Home Loan 12 15 15 19 19 20 22 23 23 25 SECTION II Management Control Alternatives and their Effects Results Controls 33 Prevalence of results controls Results controls and the control problems Elements of results controls Conditions determining the effectiveness of results controls Conclusion Notes Office Solutions, Inc Puente Hills Toyota Kooistra Autogroep Houston Fearless 76, Inc 34 37 38 42 46 46 48 58 71 78 Action, Personnel, and Cultural Controls 86 Action controls Action controls and the control problems 86 91 Prevention vs Detection Conditions determining the effectiveness of action controls Personnel controls Cultural controls Personnel/cultural controls and the control problems Effectiveness of personnel/cultural controls Conclusion Notes Witsky and Associates, Inc The Platinum Pointe Land Deal EyeOn Pharmaceuticals, Inc Axeon N.V 92 101 103 103 105 106 114 121 Control System Tightness 128 Tight results control Tight action controls Tight personnel/cultural controls Conclusion Notes Controls at the Bellagio Casino Resort PCL: A Breakdown in the Enforcement of Management Control 128 131 137 139 140 Control System Costs 173 Direct costs Indirect costs Adaptation costs Conclusion Notes Philip Anderson Sunshine Fashion: Fraud, Theft, and Misbehavior among Employees Better Beauty, Inc Fit Food, Inc Atlantis Chemical Industries 173 174 182 186 187 189 93 95 97 101 142 168 190 194 206 212 ix www.downloadslide.com Exhibit 3 USC Provost Organization 759 www.downloadslide.com Chapter 16 • Management Control in Not-for-profit Organizations Exhibit 4 Role and Mission of USC The central mission of the University of Southern California is the development of human beings and society as a whole through the cultivation and enrichment of the human mind and spirit The principal means by which our mission is accomplished are teaching, research, artistic creation, professional practice and selected forms of public service Our first priority as faculty and staff is the education of our students, from freshmen to postdoctorals, through a broad array of academic, professional, extracurricular and athletic programs of the first rank The integration of liberal and professional learning is one of USC’s special strengths We strive constantly for excellence in teaching knowledge and skills to our students, while at the same time helping them to acquire wisdom and insight, love of truth and beauty, moral discernment, understanding of self, and respect and appreciation for others Research of the highest quality by our faculty and students is fundamental to our mission USC is one of a very small number of premier academic institutions in which research and teaching are inextricably intertwined, and on which the nation depends for a steady stream of new knowledge, art, and technology Our faculty are not simply teachers of the works of others, but active contributors to what is taught, thought and practiced throughout the world USC is pluralistic, welcoming outstanding men and women of every race, creed and background We are a global institution in a global center, attracting more international students over the years than any other American university And we are private, unfettered by political control, strongly committed to academic freedom, and proud of our entrepreneurial heritage An extraordinary closeness and willingness to help one another are evident among USC students, alumni, faculty, and staff; indeed, for those within its compass the Trojan Family is a genuinely supportive community Alumni, trustees, volunteers and friends of USC are essential to this family tradition, providing generous financial support, participating in university governance, and assisting students at every turn In our surrounding neighborhoods and around the globe, USC provides public leadership and public service in such diverse fields as health care, economic development, social welfare, scientific research, public policy and the arts We also serve the public interest by being the largest private employer in the city of Los Angeles, as well as the city’s largest export industry in the private sector USC has played a major role in the development of Southern California for more than a century, and plays an increasingly important role in the development of the nation and the world We expect to continue to play these roles for many centuries to come Thus our planning, commitments and fiscal policies are directed toward building quality and excellence in the long term Adopted by the USC Board of Trustees, February, 1993 This case was prepared by Professor Kenneth A Merchant with the assistance of Sahil Parmar Copyright © by Kenneth A Merchant 760 www.downloadslide.com INDEX accountability action 90 –1, 92, 94, 134 –7, 225 of employees (controllability principle) 518, 522 –3 in governmental organizations 725, 726 accounting conservative 694 –5 fund 728 mark-to-market 456 measures see accounting measures accounting measures 397, 398, 401– financial reporting 645 – improving 455 – at King Engineering Group, Inc 434 –5 return-on-investment 406 –11 see also financial performance measures accounting methods, of data management 178 accounting rules/standards 404 and earnings management 687 for not-for-profit organizations 728 Ace Hardware 14 act of nature 520 –1 action accountability 90 –1, 92, 94, 134 –7, 225 action controls 86 –95 action accountability 90 –1, 134 –7 advantages/disadvantages of 224 –7 behavioral constraints 86 –90, 132 –3 behavioral displacement and 176 –7, 224 conditions determining effectiveness of 93 –5 and control problems 91–2 costs of 227 and creativity/innovation 225 definitions of actions 134 –5 and negative attitudes 181–2, 225 – planning and budgeting 297 preaction reviews 90 tight 131–7 understandability of 95 action reinforcement 136 –7 action tracking 90, 94, 95, 135 – activity elimination 16 –17 adaptation, to change 230 –1 adaptation costs 182 – administrative constraints 88, 132–3 administrative costs, managerial assignment of 523 Adoboli, Kweku Advanced Technologies Corporation (ATC) 694 Affordable Care Act 225 – Air Products Chemicals Inc 35 Airbus 37 Alibaba 100, 101, 183 – Allfirst Financial 93 Alphabet 452 Altman Industries, Inc 694 –5 Amazon 102, 133, 450 Ambition-to-Action (Statoil) 502– Anderson, Philip 189 –90 Anderson Industries, Inc 332–3 Anglo-American corporate governance 573, 574 anomalies in market valuation 400 –1 Aon Hewitt 363, 365 – Apple Computer, Inc 102, 231 arm’s length transfer pricing 271 Arrow Motorcar Corporation 588 –94 asset misappropriations 88 asymmetry, of information 178, 182, 302 at-risk pay/compensation 365 Atlanta Home Loan (AHL) 25 –9 Atlantis Chemical Industries 212–20 attitudes see behavior; negative attitudes attribution theory 528 –9 audit committees 583 –5, 632 audit firms 634 auditors 633 –9 external 634 internal 634 – audits 633 –9 at Bellagio Casino Resort 150 –2 compliance 637 at Desktop Solutions, Inc 649 –51 external 634 financial 636 –7 internal 91, 634 – 6, 649 judgment in 634 performance 637 761 www.downloadslide.com Index audits (continued) process/procedure 151–2 types of 636–7 value of 637–9 automation 17–18 autonomy 227, 229, 232 Axeon N.V 121–7 B corporation 722–3 balanced scorecards 456–60 Ballmer, Steve 400 Bank of America 14, 181–2 Bank of Scotland – Corporate 10, 11 Bank of the Desert (BoD) 554–60 Barclays 355 base salaries 356 Bausch & Lomb 130 Bear Stearns 89 behavior, unethical, reasons for 682–4 behavioral displacement, costs 174–6 and action controls 224 behavioral focus 231 behaviors 11–14 constraints on 86–7, 93, 132–3 detecting/preventing undesirable 92 self-interested 13 Beifang Chuang Ye Vehicle Group 532–4 Bellagio Casino Resort 142–67 benchmarking 304 benchmarks 131 Berkshire Industries PLC 442–7 best-guess performance targets 304 Better Beauty, Inc (BBI) 194–205 beyond-budgeting management model 311–12 Bezos, Jeff 102, 133 bias in measurement 43 Billings Scorecard (Game Shop, Inc.) 244–5 Bio/Precise Medical Devices (BPMD) 625–8 Black, Virginia 226 Black & Decker 353 blackjack dealers at Bellagio Casino Resort 145–6 BNP Paribas 174 boards of directors 580–3 Boeing Company 521 Bogsnes, Bjarte (Statoil) 501–06 Bonnaroo Festival 265 bonuses 358–9 at Bellagio Casino Resort 152 claw-back 368 at Harwood Medical Instruments PLC 374–5 762 bottom-up planning and budgeting 308 BP 355, 517 Bratton, William J 41 Bregier, Fabrice 37 bribes 94 Brin, Sergey 452 British Gas 130–1 Brownstein Group 222–3 budget slack 177 budgeting see planning and budgeting bugs, count as measure 175 bureaucratic organizations 180 business environments 184–5 business models and financial responsibility centers 269 business risks 184–5, 520 business-unit controllers 631–2 C corporation 722–3 Cadbury Committee 573 capital budgeting 299–300, 452 at Better Beauty, Inc 196–7 capitalization of investments 455 Carrefour 36–7 case studies Advanced Technologies Corporation 694 Altman Industries, Inc 694–5 Anderson Industries, Inc 332–3 Arrow Motorcar Corporation 588–94 Atlanta Home Loan 25–9 Atlantis Chemical Industries 212–20 Axeon N.V 121–7 Bank of the Desert (BoD) 554–60 Beifang Chuang Ye Vehicle Group 532–4 Bellagio Casino Resort 142–67 Berkshire Industries PLC 442–7 Better Beauty, Inc 194–205 Bio/Precise Medical Devices 625–8 budget targets 694 Catalytic Solutions, Inc 462–9 Central Maine State University (CMSU) 695–6 Cisco Systems, Inc 708–17 conservative accounting 694–5 Consolidated Furniture Corporation (CFC) 697 Corbridge Industries, Inc 424–32 Desktop Solutions, Inc 648–59 Diagnostic Products Corporation 233–41 Dortmunder-Koppel GmbH 470–7 Eastern Technologies, Inc (ETI) 641–7 Entropic Communications, Inc 610–24 www.downloadslide.com Index expiring software licenses 698 EyeOn Pharmaceuticals, Inc 114–20 Family Care Specialists Medical Group, Inc 252–8 Fine Harvest Restaurant Group 561–4 Fit Food, Inc 206–11 Game Shop, Inc 242–51 Global Investors, Inc 285–96 golden parachutes 594–7 Haengbok Bancorp 422–4 Hoffman Discount Drugs, Inc 534–40 Houston Fearless 76, Inc (HF76) 78–85 Howard Building Corporation (HBC) 541–53 Industrial Electronics, Inc 421–2 Johansen’s Scorecard System 478–87 King Engineering Group, Inc 433–41 Kooistra Autogroep 71–8 Kranworth Chair Corporation 275–82 Las Ferreterías de México 417–20 Leo’s Four-Plex Theater 22–3 Lernout & Hauspie Speech Products (L&H) 701–8 Lincoln Electric 36 LP&F Cargo Ltd 660–76 Mainfreight 488–500 Mean Screens USA 700–1 Office Solutions, Inc 48–57 Olympic Car Wash Company 531–2 Pacific Sunwear of California, Inc 598–609 PCL Consumer Electronics 168–72 Platinum Pointe land deal 106–13 Private Fitness, Inc 23–5 Puente Hills Toyota 58–70 Raven Capital, LLC 384–93 Robinson Brothers Homes 106–13 Royal Wessanen NV 315–22 Sales Acceleration Program 697 SCI Ontario 735–45 Statoil 501–16 Stuart & Co 189–90 Sunrise Medical 36 Sunshine Fashion 190–4 Superconductor Technologies, Inc 375–83 The Stimson Company (TSC) 323–31 University of Southern California (USC) 746–60 VisuSon, Inc 342–52 Vitesse Semiconductor Corporation 333–41 Wired, PLC 699–700 Witsky and Associates, Inc., 105–6 Wong’s Pharmacy 23 Zumwald AG 283–4 cash and credit management/controls at Bellagio Casino Resort 146–8 cash flow, discounted 300, 455 cast members 100 Catalytic Solutions, Inc 462–9 Central Maine State University (CMSU) 695–6 centralization 18 Chandler, Richard 36 change, adaptation to 230–1 channel stuffing 405 Chaudhri, Fazal 629 checklists, for accountability 90 Chen, Tony 38 chief executive officers (CEOs) 577 chief financial officers (CFOs) 577, 629 at Eastern Technologies, Inc (ETI) 641–7 China consumer electronics in 168 corruption in 36–7 incentives/controls in 353 Cho, Fujio 180 churning accounts 174 Cisco Systems, Inc (Cisco) 264, 708–17 Citibank 38–9 Citigroup 133–4, 449 claw-back of bonuses 368, 454 cloud computing 16 Coca-Cola 363, 526 codes of conduct 98–9, 681, 690, 709–10 collusion between employees 88, 132 combinations of measures 397 systems to remedy myopia 456–60 commissions and churning accounts 174 at Houston Fearless 76, Inc 81 commitment, to targets 305–6 compensation committees 585–6 compensation systems at Beifang Chuang Ye Vehicle Group 533–4 at Catalytic Solutions, Inc 465–6 at Diagnostic Products Corporation 235–8 at Dortmunder-Koppel GmbH 471–2 at Family Care Specialists Medical Group, Inc 254–6 pay-for-performance 33–4, 365 at Raven Capital, LLC 386–7 at Superconductor Technologies, Inc 376–8 see also incentive systems competitive factors and uncontrollability 520 complete profit center 266 763 www.downloadslide.com Index completeness of controls 130 compliance audits 637 congruence 39 and accounting measures 402, 403 and behavioral displacement 175 and market measures 398 and results controls 128–9 consequentialism ethical model 679–80 Consolidated Furniture Corporation (CFC) 697 Continental Airlines 176 contingency planning/exercises 526 control good 15, 231–2 control alternatives 19 control-caused operating delays 180 control deficiency, defined 578 control indicators, ethics and 687–9 control loss 15 control problems 37–8 action controls and 91–2 avoidance of 15–19 causes of 12–14 and lack of direction 12 and motivation 12–14, 37 and personal limitations 14 personnel/cultural controls and 101 controllability principle 42–3, 518, 522–3 controllable profit 523 controllers 629–33 at Eastern Technologies, Inc (ETI) 641–7 controls choice of 222–9 coordination, planning for 298 Corbat, Michael 38–9 Corbridge Industries, Inc 424–32 corporate ethics programs 689–90 corporate governance 573–86 Anglo-American system 573, 574 defined 573 European/Japanese system 573, 574, 575 laws and regulations 574–5 management control system and 573–4 see also Sarbanes-Oxley Act (SOX) corporate social responsibility (CSR) 721 Corus 304 cost centers 263–4 cost efficiency of measures 45–6 cost-efficient reward systems 366 cost-focused entities 265 cost of capital 403–4 764 costs 173–86 of action control 227 adaptation 182–6 administrative, managerial assignment of 523 of automation 18 of capital 403–4 direct 173–4 of financial results control systems 262 indirect 174–82 of longer-term investments 451 of management intervention 306–7 courage, and ethics 681–2 creativity, and control 225 Crédit Agricole 449 critical success factors 229 Cronk, William F 101 Cryan, John 367 cultural controls 86, 97–103 behavioral displacement and 177 and control problems 101 design and evaluation 222–4 effectiveness of 101–3 tight 137–9 culture 223 at Volkswagen 223–4 cutoffs/caps, in incentive system 364–5 data manipulation/management of earnings 405, 449, 642–3, 686–7 as indirect cost 178–9 Davis Service Group 298 decentralization 35, 36, 37, 121 at Atlantis Chemical Industries 214–15 decision authority 132 decision-making authority 267 Dell 139 Deloitte 176–7 design and evaluation 221–32 personnel/cultural controls 222–4 desired actions 93–5 desired results 42–3, 128–30, 221 Desktop Solutions, Inc 648–59 Deutsche Bank 16 developmental expenses 451 Diagnostic Products Corporation 233–41 direct costs 173–4 direct supervision//monitoring 90 directors 580–3 finance director 629 discounted cash flow 300, 455 www.downloadslide.com Index discretionary cost centers 264 Disneyland 100 distorted incentives 175 division controllers 631–2 divisionalization 406 and financial responsibility centers 267–8 at Kranworth Chair Corporation 277–8 document assembly software 17 Domino’s Pizza 527–8 Dortmunder-Koppel GmbH (DKG) 470–7 Dreyer’s Grand Ice Cream 101 Drucker, Peter 448 dual-rate transfer prices 273 Dudley, Bob 355 DuPont 35 earnings, management of 405, 449, 642–4, 686–7 see also profits Eastern Technologies, Inc (ETI) 641–7 economic factors and uncontrollability 520 economic income 399, 455 Economic Value Added (EVA) 412–13, 456 Education Food Services 695–6 effort-directing incentives 355 effort-inducing incentives 355 electronic control regimes 226 electronic sweatshops 689 Elson, Charles 581 EMC 16 Emerson Electric 457 Employee Stock Ownership Plan (ESOP) 434 employees accountability of (controllability principle) 518, 522–3 action tracking 90, 94, 95, 135–6 and autonomy 227, 229, 232 collusion between 88, 132 controllability principle 42 lack of direction 12 licensing of 149 loyalty of 95 and motivation 12–14, 355 in not-for-profit organizations 731 and performance measures 39 personal limitations 14 punishments 40 risk aversion 228, 519 rotation of 100 selection and placement 95–6 subjectivity in contracts 364 timeliness 44 empowerment 34 engineered cost centers 263 engineered targets 302 Enron 691 enterprise risk management, at Entropic Communications, Inc 611–13 entrepreneurial model 35 Entropic Communications, Inc 610–24 escalating commitment 300 ethical analyses, importance of 678–82 ethical issues 677–91 analyzing 682 codes of conduct 98–9, 681, 690, 709–10 management control-related 684–9 ethical models 679–82 ethics and budgetary slack 685–6, 695–6 at Cisco Systems, Inc 708–17 codes of conduct 98–9, 681, 709–10 and control indicators 787–9 and earnings management 642–4, 686–7 good 689–91 European/Japanese corporate governance 573, 574, 575 evaluation see design and evaluation ex post facto 528 exchange rate variance 525 excuse culture 528 Exelco 629 expectancy theory 41 expiring software licenses 698 external audit/auditors 634 external scrutiny, not-for-profit organizations 728–30 external targets 303–4 extrinsic rewards 41 EyeOn Pharmaceuticals, Inc 114–20 facilitating payments 94 falsification, of data 178 Family Care Specialists Medical Group, Inc 252–8 feasibility of automation 18 of controls 224 of market measures 401 of results controls 227 feed-forward control 298 feed-forward control system 458 feedforward control 298 fiduciary duties/obligations 574 of controllers 631 765 www.downloadslide.com Index finance director 629 Financial Accounting Standards Board (FASB) 727 financial audits 636–7 financial performance measures 397–413 accounting measures see accounting measures and congruence 402, 403 and divisionalized organizations 406 Economic Value Added (EVA) 412–13 market measures 397, 399–401 nonfinancial measures 397 summary measures 397, 401, 402 value creation 498–9 see also performance evaluation and measurement; performance targets financial reporting at Eastern Technologies, Inc 645–6 at SCI Ontario 737 financial responsibility centers 261–274 choice of 267–9 and controllability principle 522 cost centers 263–5 investment centers 266 profit centers 264–6 revenue centers 263 and transfer prices 266, 269–74, 287–9 types of 262–6 and uncontrollable factors 522–3 financial results control systems 261–2 Financial Services Authority (FSA) 3, financial statement fraud 88 Fine Harvest Restaurant Group 561–70 firm value 397, 721 Fit Food, Inc 206–11 fixed performance targets 302–3 flexible budgets 526 flexible performance standards 526–7 flexible performance targets 302–3 foolproof system 89 force majeure 520–1 forecasting at Houston Fearless 76, Inc 80 at Statoil 504–6 forecasting errors 527 Foreign Corrupt Practices Act 94 foreign currency translation risk 185–6 formulaic rewards 364 franchises 90 fraud triangle model 683–4 frauds 3–4 and collusion between employees 88, 132 766 at Lernout & Hauspie Speech Products 704–5 occupational 88 sophisticated 136 at Sunshine Fashions 191–3 fraudulent trading 3–4 free riding effect 370 full cost plus a markup transfer pricing 270, 272 full cost transfer pricing 270, 272 functions of management fund accounting 728 future-oriented control 15 Game Shop, Inc (GSI) 242–51 games controls, at Bellagio Casino Resort 149–52 gamesmanship/gameplaying and budget targets 307–8 as indirect cost 177–9 slack resources, creation of 177–8 stock market valuations 449 gaming laws and regulations 144–5 garbage collectors, and behavioral displacement 175–6 General Electric (GE) 229, 449, 450, 526 General Motors (GM) 35–6 Generally Accepted Accounting Principles (GAAP) 361, 636 Gill, Gary 13 Giraldo, Maria 40 Global Investors, Inc 285–96 Global Restructuring Group (GRG) 264 goals see targets/goals golden parachutes 594–7 Goldman Sachs 138 good control 15, 231–2 GoodData 11 Google 452 Code of Conduct for 681 Gorsky, Alex 36 government intervention, and business risk 184–5 governmental organizations 723 accountability of 725, 726 conflict in 725 Grace, Adrian 10, 11 Green, Stephen 368 Griffith, Ray 14 gross book values (GBV) 410 gross margin center 266 gross margins 265 group rewards 99–100, 370 Gulf of Mexico oil leak 355, 517 Gulliver, Stuart www.downloadslide.com Index Haengbok Bancorp 422–4 Haier 301, 353 Hakes, Howard 48 Hamel, Gary 304 Hammer, Michael 35 Handelsbanken 359 Harch Capital Management 449 Harding, Andrew 17 Harwood Medical Instruments PLC (HMI) 374–5 Havens, John 133–4 Hay Group 33 healthcare, in Los Angeles 253 Hewlett-Packard (HP) 232 hierarchies, control through 16 hindsight bias 364 hindsight effect 528 historical targets 302 Hitchcock Automotive Services 48 Hoffman Discount Drugs, Inc 534–40 Hofrichter, David 365 Hofstede, Geert 183 Hollandsworth Ltd 121–2, 124 Honesty Project (game) 139 honeypots 88 Houston Fearless 76, Inc (HF76) 78–85 Howard Building Corporation (HBC) 541–53 HSBC 4, 369 Huawei 37 IBM 178, 405–6, 450 incentive formula 364 incentive system 36, 37, 39, 353–70 as action reinforcement 136–7 at Atlantis Chemical Industries 213 at Bank of the Desert 555 and base salaries 356 at Berkshire Industries PLC 442–3 at Better Beauty, Inc 197 bonuses see bonuses and compliance 356 cutoffs/caps in 364–5 design 364–5 effort-directing 355 effort-inducing 355 evaluation criteria 365–70 at Fit Food, Inc 206–7 at Houston Fearless 76, Inc 82–4 informational purpose of 355 Johansen’s Scorecard System 479–81 at King Engineering Group, Inc 437–9 at Kranworth Chair Corporation 278–9 at Las Ferreterías de México 418–19 long-term 359–64, 453–4 monetary 354–5, 357–64, 366–70 motivational aspect of 355–6 non-monetary 353–4 purposes of 355–7 results controls and 130–1 short-term 358–9, 364 tailored systems 41 and taxation 356 see also compensation systems; rewards incomplete profit center 266 indexed options 362 indirect costs 174–82 individualism, and national culture 183 Industrial Electronics, Inc 421–2 industry volume variance 525 inflation 185 information asymmetry 178, 182, 302 information sharing, in target setting 309 innovation, and control 225 insurance 18–9, 522 integrity, ethical virtue 681 intended strategy 10 interdependence, and uncontrollability 521 internal audit/auditors 91, 634–6, 649 internal controls 89, 137, 580 Internal Revenue Service (IRS) 87 internal targets 303–4 International Financial Reporting Standards (IFRS) 361 intra-organizational transfers 100 intrinsic motivation 95 intrinsic rewards 41, 681 investment centers 266 investment myopia 404–6 Jaburg Wilk 96 JDA 16 Jensen, Michael 398 job design 97 job rotation 100 Jobs, Steve 102 Johansen’s Scorecard System 478–87 Johnson & Johnson 36, 450 Jones Day 38 judgment in audits 634 professional 90 767 www.downloadslide.com Index Juschus, Alexander justice/fairness ethical model 680–1 K-values 138 Kelleher, Herb 102 Kellogg 138 key actions/results 221, 229 key performance indicator (KPI) 229 at Statoil 502–6 killing entrepreneurship 180 King, Joe 16 King Engineering Group, Inc 433–41 Kitson, Alison 228 knowledge of desired actions 93–5 of desired results 42 in objectives setting 9–10 Koch, Charles 34 Koch Industries 34 Kooistra Autogroep 71–8 Koskinen, John 87 KPMG 12, 13 KPMG Forensic 133, 138 KPMG International 705–6 Kranworth Chair Corporation 275–82 lack of direction 12, 222, 300 Lagarde, Christine 678 Lampert, Edward 36 Las Ferreterías de México 417–20 leased assets 411 Lee, Matthew 688 Leo’s Four-Plex Theater 22–3 Lernout & Hauspie Speech Products (L&H) 701–8 Levi Strauss 177 Lewitt, Michael 449 Liang, Charles 132 licensing of employees 149 likely results 221 Lincoln Electric 36 Lloyd 358 local institutions 184 long-term incentive plans (LTIPs) 360, 453–4 at Dortmunder-Koppel GmbH 472–4 long-term incentives 359–364 Los Angeles Department of Water and Power (DWP) 725 loyalty 95 as ethical virtue 681 LP&F Cargo Ltd 660–76 Luckhurst, Jason 9, 10 768 MacLeod, Andrew 365 Mainfreight 488–500 Mairena, Bob 48 Mairena, Cindy 48 managed cost centers 264 management defined 6–7 management-by-exception 38, 262, 298 management control system (MCS) 11 characteristics of good 15 and corporate governance 573–4 problem avoidance 15–19 situational factors 231 views of 7–8 see also control problems management intervention, uncontrollability of 522 managerial myopia 130 marginal cost transfer pricing 270, 271–2 marginal costs plus a fixed lump-sum fee 273 mark-to-market accounting 456 market-based transfer pricing 271 market prices 270 market share variance 525 market value, of firm 399 marketing at Houston Fearless 76, Inc 80–2 markets control through 16 Marriott International 521 masculinity, and national culture 183 master games worksheet (Bellagio) 150–1 material weakness (Sarbanes-Oxley Act) 577, 578 May, Theresa 229 Mayo, Mike 449 McCormick, Matt 449 McDonald, David 242 McDonald’s 90 McGunnigle, Paul 541 Mean Screens USA 700–1 means-ends inversion 176 measurement see performance evaluation and measurement MemorialCare Health System 45 meritocracies 34 Merrill Lynch 181–2 MGM MIRAGE see Bellagio Casino Resort micro profit centers 265 Microsoft 400, 577, 579 model-based targets 302 models of ethics 679–82 www.downloadslide.com Index Moneta Group 96–7 monetary incentives 354–5, 357–364 evaluation criteria 366–70 moral courage 684 moral disengagement 684 motivation 12–14, 37, 41, 298, 305, 355–6 intrinsic 95 multinational organizations (MNOs) 182–3 multiple transfer pricing methods 274 multitasking nature of jobs 397 mutual benefit organizations 723 myopia problem 398, 404–6 accounting measures improvement 455–6 measurement horizon 453–4 remedies to 448–60 and shareholder value 455 and stock market valuations 448–9 mystery shoppers 90, 150 naming and shaming 353 national culture and adaptation costs 183–4 defined 183 taxonomies of 183 National Health and Hospitals Reform Commission 33–4 negative attitudes and action controls 225–6 costs of 180–2 negotiated targets 302 negotiated transfer pricing 270–1, 272–3 net book values (NBV) 409, 410 Netflix 132 New York City Police 41 non-monetary incentives 353–4 nonfinancial measures 397 not-for-profit organizations 721–31 accounting differences 727–8 employees in 731 external scrutiny 728–30 for-profit organizations vs 723–4 performance of 725–27 objective setting 9–10 objectives 221 see also congruence; targets/goals objectives-driven control 15 objectivity of action reports 94 of results control measurements 39, 44 occupational frauds 88 Office Solutions, Inc 48–57 Olympic Car Wash Company 531–2 Opel 35 operating delays, as indirect cost 180 operating expenses 451 operating income 451 operating methods, of data management 178–9 operating myopia 404–6 operational budgeting 300–1 optimal control 15 optimistic projections, and targets 306 option plans 360–4 organizational architecture 37 organizational culture see management style/culture organizational strategy see strategy organizational structure centralization 18 decentralization 35, 36, 37, 121 divisionalization 267–8, 277–8, 406 and financial responsibility centers 267–9 Ott, Linda 342 out of control 15 out-of-pocket costs 173 outcome effect 528 Pacific Sunwear of California, Inc (PacSun) 598–609 Page, Larry 452 Parker, Tim 37 pay-for-performance 33–4, 358, 365 pay-performance function 364 PCL Consumer Electronics 168–72 penetration testers 88 perfect control 15 performance audits 637 performance bonds 454 performance-dependent rewards 356 performance dimensions 38–9 performance evaluation and measurement 39–40 at Atlantis Chemical Industries 213 at Bank of the Desert 555 at Bellagio Casino Resort 143 at Fine Harvest Restaurant Group 562–3 Johansen’s Scorecard System 479–81 at King Engineering Group, Inc 434–5 at Kranworth Chair Corporation 278–9 at Mainfreight 492–3 in not-for-profit organizations 725–7 objectivity of 39, 44 precision of 43–4 relative performance evaluation (RPE) 400, 527–8 769 www.downloadslide.com Index performance evaluation (continued) reporting 523 results controls 228 at Statoil 506–7 subjective judgments/evaluations 39 subjective performance evaluations 528–9 and tight results control 130 timeliness 44 at University of Southern California 748–50 weighting 40 see also financial performance measures performance management system (PMS) Mainfreight 489 performance options 362 Performance Prisms method 457 Performance Share Units (PSUs) 363 performance stock plans 362–4 performance targets and commitment 305–6 and costs of management intervention 306–7 engineered targets 302 external targets 303–4 financial targets issues 304–10 fixed targets 302–3 flexible targets 302–3, 526–7 internal targets 303–4 and motivation 305 negotiated targets 302 and optimistic projections 306 setting 40, 301–10 at Statoil 504–6 see also gamesmanship/gameplaying; targets/goals performance-vested options 362 personal limitations 14 personnel see employees personnel controls 86, 95–7 behavioral displacement and 177 and control problems 101 design and evaluation 222–4 effectiveness of 101–3 tight 137–9 Petter, James 16 Philippines’ Bureau of Internal Revenue 130 physical arrangements 100 physical constraints 86–7, 132 physical sweatshops 689 Pita Pit 96 planning and budgeting 297–312 as action controls 297 budget targets 694 770 budgetary slack 177–8, 685–6, 695–6 at Corbridge Industries, Inc 425–6 at Dortmunder-Koppel GmbH 471 Fine Harvest Restaurant Group 562–70 flexible budgets 526 at King Engineering Group, Inc 435 and motivation 298 practices 310–12 purpose of 297–9 rolling budgets 527 at Royal Wessanen NV 316–18 scenario planning 526, 527 at VisuSon, Inc 344–5 see also performance targets planning cycles 299–301 Platinum Pointe land deal 106–13 poka-yokes 89 pooled interdependencies 521 Powell, Richard 133 power distance, and national culture 183 Practicus 9, 10 preaction reviews as action control 90 for management oversight 298 and negative attitudes 181 and tight controls 133–4 precision 43–4, 94 premium options 362 private benefit organizations 723 Private Fitness, Inc 23–5 proactive controls 298 problem avoidance 15–19 see also control problems processes of management professional employees 35 professional judgment 90 profit centers 264–6 profits as accounting measure 403 controllable 523 repatriation of 270 and short-termism 450–1 and uncontrollable factors 520, 523 Progressive (Ohio-based insurance company) 450 public benefit organizations 723 Puente Hills Toyota (PHT) 58–70 punishments 40, 353 ratcheting 302 Raven Capital, LLC 384–93 reactive controls 298 www.downloadslide.com Index reciprocal interdependencies 521 redundancy, as action control 91 Reilly, Nick 35–6 relative performance evaluation (RPE) 400, 527–8 repatriation of profits 270 reporting financial see financial reporting segregated performance reports 523 solid-line 632–3 residual income measures 411–13 responsibility centers see financial responsibility centers restricted stock plans 361 restricting decision authority 132 results controls 33–46 advantages and disadvantages of 227–9 behavioral displacement and 174–6 completeness of 130 conditions determining effectiveness of 42–6 and control problems 37–8 controllability principle 42–3 desired results 42–3, 128–30, 221 elements of 38–41 and empowerment 34 financial systems 261–2 likely results 221 negative attitudes produced by 181 prevalence of 34–7 tight 128–31 return-on-investment (ROI) measures 406–11 problems caused by 408–11 revenue centers 263 reversible rewards 366 rewards 40, 181 cost efficient 366 durable 366 extrinsic 41 formulaic 364 group 99–100, 370 intrinsic 41, 681 performance-dependent 356 reversible 366 understandability of 366 see also incentive system rights and duties ethical model 680 Rio Tinto 17 Riordan, Richard 732 risk aversion, employees 228, 519 business 184–5, 520 enterprise, at Entropic Communications Inc 611–13 foreign currency translation 185–6 limiting 16 sharing 18–19 see also uncontrollable factors Robinson Brothers Homes 106–13 ROI trees 406 role-based allowances 356–7 rolling budgets 527 Rosner, Josh 449 Royal Bank of Scotland 264, 358 Royal College of Nursing (RCN) 228 Royal Wessanen NV 315–22 rubber stamping 134 Russell, Don 641–7 salaries base 356 increases in 357 variable pay 356, 358 see also incentive system Sales Accleration Program (Consolidated Furniture) 697 sales-focused entities 265 sales forecasting at Houston Fearless 76, Inc 82 sales price variance 525 Samaniego, Luis (Family Care Specialists) 252–8 Samsonite 37 sandbagging 685 Sanofi-Aventis 35 Sarbanes-Oxley Act (SOX) 574, 575–80 and auditors 633 compliance at Cisco 711–12 compliance at Game Shop, Inc 243 compliance at Pacific Sunwear 599–602 provisions of 576–7 and whistle blowers 677 Scavell, Andrew G 660–76 scenario planning 526, 527 Schloth, Peter 359 scientific management 13 scorecards 39 balanced 456–60 at Game Shop, Inc 244–5 Johansen’s 478–87 at Statoil 502–4 Section 365 (Sarbanes-Oxley Act) compliance at Pacific Sunwear 599–602 Securities and Exchange Commission (SEC) 137, 574–5 771 www.downloadslide.com Index segregated performance reports 523 segregation of information principle 88 self-interested behaviors 13 self-monitoring 95 separation of duties 88–9 September 11 terrorist attacks 521 sequential interdependencies 521 shareholder value 455 shareholders 184, 575 Shell 367 short-term incentives 358–9, 364 short-termism of employees (bonuses) 368 and profits 450–1 and results controls 174 see also myopia problem significant deficiency, defined 578 simultaneous tight-loose controls 230 situational factors 231 slack, creation of 177–4, 685–6, 695–6 Slater & Gordon 370 Sloan, Alfred P 35, 402–3 social arrangements 100 software licenses 698 solid-line reporting 632–3 South Bend Tribune newspaper 226 Southwest Airlines 102, 230 Specificity, of performance expectations 129 Spinal Cord Injury Ontario (SCI Ontario) 735–45 stakeholders 9, 38, 184, 677 standard cost centers 263 Stanek, Roman 11 Statoil 501–16 Stern Stewart & Company 456 Stimson, Henry 323 Stock Appreciation Rights (SARs) 363 stock market valuations 448–9 stock option plans 360–4 strategic business unit (SBU) 35, 182 strategic planning 299 at Corbridge Industries, Inc 427–8 at SCI Ontario 737 strategy 221 and financial responsibility centers 268–9 formulation of 10 intended 10 at Statoil 502–4 Stuart & Co 189–90 subjective performance evaluations 528–9 subjectivity in employment contracts 364 772 suboptimization 398 and ROI measures 408 subsidiary companies of Axeon N.V 123–4 summary accounting measures 397, 401, 402 Sunrise Medical 36, 179 Sunshine Fashion 190–4 Super Micro Computer 132 Superconductor Technologies, Inc 375–83 supervision/surveillance, at Bellagio Casino Resort 150 talent 185 targets/goals ambiguity/conflict in not-for-profit organizations 724–5 communication/internalization 129 see also performance targets targets-incentives-measurement 297 taxation 356 teamwork 177 Tesco 14, 131, 179, 679 theft, at Sunshine Fashions 191–3 The Stimson Company (TSC) 323–31 Thompson, Wade 33 Thor Industries 33 3M Corporation 457 Tiffany’s 89 tight action controls 131–7 behavioral constraints 132–3 preaction reviews 133–4 tight controls 229–30 tight personnel/cultural controls 137–9 tight results controls 128–31 and engineered targets 302 timeliness in results control 44 in tracking actions 95 Tirole, Jean 40 today businesses/tomorrow businesses 452 tone at the top 100 top management oversight 298 Toshiba 102 Toyota Motor Corporation 180 trafficking rings and performance targets 39 training 96–7 transaction cost economics 16 transfer pricing 266, 269–74 alternatives 270–3 at Global Investors, Inc 287–9 and interdependencies 521 purposes of 269–70 www.downloadslide.com Index Treadway Commission 573 treasury function 630 Turner Broadcasting 133 UBS 3–4, 367 uncertainty, country-specific environmental 184 uncertainty avoiding individuals 183 uncontrollable factors and controllability principle 518–20 controlling distorting effects of 522–9 issues 529 and profits 520 and results controls 228 types of 520–2 understandability of accounting measures 402 of combination of measures systems 458 of results controls 44 of rewards 366 unethical behavior, reasons for 682–4 United Parcel Service (UPS) 181 University of Southern California (USC) 728, 746–60 US Foreign Corrupt Practices Act (FCPA) 625–7 US Government Accountability Office (GAO) 137 utilitarianism ethical model 679–80 valences 41 valuation anomalies in markets 400–1 value creation 398–9 value drivers 456–60 van der Veer, Jeroen 367 variable pay 356, 358 variance analysis 263, 524–5 vice president finance (VP Finance) 629 virtues ethical model 681–2 VisuSon, Inc 342–52 Vitesse Semiconductor Corporation 333–41 volcanic ash cloud, effects of 521 Volkswagen 4–5, 223–4 Volvo 303, 304 Wabash National Corporation 137–8 Wal-Mart 36–7, 131 Warren, Venkat 45 weighted average cost of capital 411 Welch, Jack 229, 304 whistle-blowers 101, 677 Wired, PLC 699–700 Witsky and Associates, Inc., 105–6 Wong’s Pharmacy 23 Wright, Sean 206 Wright, Vicky 33 zero-based budgeting 302 Zhengfei, Ren 37 Zumwald AG 283–4 773 ... The Control Function of Management Management and Control Management and control Causes of management control problems Characteristics of good management control Control problem avoidance Control. .. Cataloging-in-Publication Data Names: Merchant, Kenneth A., author | Van der Stede, Wim A., author Title: Management control systems: performance measurement, evaluation and incentives / Kenneth A Merchant, University... Financial Results Controls in the Presence of Uncontrollable Factors 517 SECTION I The Control Function of Management Management and Control SECTION II Management Control Alternatives and Their Effects