How To Design A Performance Based Management Control System

Transcription

1 Interview: HOW TO MEASURE AND REWARD MANAGEMENT S PERFORMANCE INTRODUCING A COURSE ON DESIGNING SUCCESSFUL CONTROL SYSTEMS 18 MCA: juni 2007, nummer 3 Andrey Armyagov: beeld

2 Designing effective control systems for performance measurement and reward pose a difficult challenge to controllers, CFO s and accountants. It involves selecting a fitting mix of performance measures and ways to use them; and, as the pay-forperformance theorists state, complementing these with incentives that motivate managers, not just to be on budget, but to optimize organizational performance. On June 14 and the Controllers Instituut will host a course on Designing successful control systems by Ken Merchant and Frank Hartmann. Arnout Druyvesteyn: The question how to measure and reward managerial performance is one of the more fundamental and interesting issues, when designing management control systems. Indeed, issues surrounding performance measurement have been addressed from at least two perspectives. From the accounting perspective the question is what metrics support the measurement of value creation. From an organizational behavior perspective, the question is how performance measurement systems relate to other managerial tools to steer organizations and motivate their managers. Both perspectives emphasize that designing effective organizational measurement and control People only work towards concrete goals, not towards moving targets systems for performance measurement and reward provides a tough challenge for financial managers and controllers. On June 14 and 15 the Controllers Instituut organizes a course on Designing successful control systems, which, the CI is proud to announce, Ken Merchant and Frank Hartmann have agreed to host jointly. The course will address both the conceptual and hands-on questions related to management control system design, and will be structured along several critical issues of such design. During a preliminary conference call, Hartmann and Merchant discuss some of these critical issues, related to the criteria for good control, the relationship between organizational strategy and management control, and the pros and cons of the large emphasis on performance-related pay systems in contemporary management control thinking. Hartmann: When I was first introduced to the field in the early nineties, I liked the broad approach to management control that you seemed to emphasize. Control is about getting the right people, having them make the right decisions and measuring the results of their decisions. This implies that control should extend beyond the traditional boundaries of accounting to include, for example, HR. It appears to me that this broad view is less accepted today, as management control seems almost equated these days with performance-related pay. Also in the latest version of your book, you really seem to be emphasizing financial controls more than ever. Merchant: Yes, you re right. We realize more and more that our competitive advancement here is that we are accountants. Our expertise is in measurement. Measurement and pay for performance may not be not the best control measure for all situations, but it is indeed what my book is about. It doesn t apply well in the lower levels of the organization, but for the higher echelons, it does. Pay for performance is not the way to control secretaries. There we have other means to make sure they do what they are supposed to do. It all depends of course on your definition of management control. MCA: juni 2007, nummer 4 19

3 Sooner than later we ll discover a major fraud case in a SOx compliant company other hand, strategy is absent in many current in control discussions, which are driven by external pressures of the SOx-type. Indeed, many principles of good management control are not strategy specific, but emphasize solving the agency problem. Also the emphasis on value creation has moved attention somewhat away from strategy. Hartmann: Despite this focus, many people still associate management control with action control, don t they? Merchant: I agree, it is the terminology I guess, and actually we are going back in that direction with SOx. Everything has to be documented, control is viewed as bureaucracy. All in all I think SOx is good at solving the little problems, but it has an Achilles heel in possible management overrides at the top. We are all waiting for the discovery of a major fraud case in a company that is believed to be SOx compliant. And it will come sooner than later. Merchant: I see your point. Some would even argue that strategy comes in an emergent way, rather than being a fixed plan that is implementable via the management control system. In this view strategies evolve over time, and only afterwards you may conclude that a company has followed a certain strategy. But I think that most organizations do know how they want to compete in the markets they re in; what they are good at, and what their opportunities are. I would also belief that without a strategy, it is very difficult to control an organization. Your question reminds me that my textbook could alternatively be labeled Implementing Strategy or Strategy execution. Hartmann: You can almost predict the reactions that will give. But at the same time, these developments seem to stimulate interest in, what you could call the softer side of controls these days. Some would claim that a factor like organizational trust is even more important than control, although I do not really believe they are comparable alternatives. Recently, the case has been made that formal controls indeed enhance organizational trust. This is also what I find in my own investigation. I suppose this is what you have always called cultural control. Merchant: Cultural controls for me means social controls that is, the norms and values that embed themselves in an organization. They go wrong quickly though, if you have a rotten apple in your organization, for example a CEO with exorbitant greed. So I agree that we really cannot rely solely on social controls. Hartmann: Another issue that raises a lot of disputes is the relationship between management control and strategy. Over the last decades, the majority on management control textbooks seems to emphasize strategy as the most dominant determinant of management control system design. On the Hartmann: I agree that this is the classical view that fits the idea of control as a grand cybernetic cycle. But the view becomes problematic when organizations change their strategies all the time, when their time horizon is becoming smaller and when they are starting up. It seems to me that the traditional view of strategy as a long-term and stable determinant of the control system is loosing validity. Moreover, there are principles of good control that are valid regardless of strategy. Merchant: That is an interesting issue indeed, and we should turn it into a research question: How the volatility of today s business environments affects strategy and management control. Hartmann: That may not be a bad idea. Of course, there is some relevance of this issue to controllers, their role in the control system and their strategic scope. By the way, do you see differences between our country and the US regarding the role of controllers and the control philosophy? Merchant: I don t have good data on this, but I have the feeling that the concept of pay-for-performance is stronger in the US than in Europe _ US controllers play a more important role in operatio- 20 MCA: juni 2007, nummer 4

4 Frank Hartmann (MSc PhD EMFC) received his PhD from Maastricht University where Kenneth Merchant was his dissertation supervisor. He now holds the post of professor of Management Accounting and Management Control at RSM Erasmus University, researching management control systems and their relationships with strategy and organizational trust. Frank Hartmann co-authors the textbook series Informatie & Control (Wolters-Noordhoff, 2005, 2006). He is chairman of the VRC, the Dutch organization of chartered controllers. Ken Merchant (MBA PhD CPA) holds the Deloitte & Touche Chair of Accountancy at the University of Southern California (USC). His current research focuses on various issues related to the design and effects of performance measurement/evaluation/incentive systems and corporate control/governance systems. He is co-author with Wim van der Stede (LSE) of the best selling textbook Management Control Systems: Performance Measurement, Evaluation and Incentives (London, 2007). MCA: juni 2007, nummer 4 21

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6 In deze zelfstandige functie ben je verantwoordelijk voor de financiële onderbouwing van asset management. Je verzorgt projectcalculaties en rapportages voor nieuwbouw- en herstructureringsprojecten als input voor de besluitvorming en je adviseert hierover. Daarnaast behoort ook de waardebepaling van de vastgoedontwikkeling tot jouw taakgebied. HBO/academisch werk- en denkniveau, een relevante bedrijfseconomische opleiding en ervaring. Je hebt uitstekend inzicht in de waardeontwikkeling van vastgoed. Je bent een stevige, pro-actieve persoonlijkheid. Je signaleert tijdig kansen en bedreigingen, stelt kritische vragen en geeft (proces)verbeteringen aan. Je werkt zelfstandig en bent flexibel en inspirerend naar je omgeving. Je hebt een goed analytisch vermogen en communiceert makkelijk op verschillende niveaus. Je hebt de capaciteiten om door te groeien in dit vakgebied. Een uitdagende en zelfstandige functie binnen een dynamische organisatie met veel ruimte voor initiatief. Je ontwikkelt mee met de organisatie, o.a. door gebruik te maken van de studiemogelijkheden. Een goede marktconforme salariëring (CAO Woondiensten), prestatiebeloning en secundaire arbeidsvoorwaarden. Evert van Dooren, manager Vastgoedadministratie, T Stuur voor 11 juni 2007 je uitgebreide motivatie met CV naar sollicitaties@woonmaatschappij.nl t.a.v. Erik Gies, P&O-adviseur. nal performance management, while in Europe they tend to focus more on financial reporting. So the controller in the US will tend to become more involved in strategy. Hartmann: The development of this way of thinking is interesting. Following Kaplan and Norton, many organizations have started to use BSC-type measurement systems. But today, this instrument seems on the way out. In reaction, the concept is revived through techniques such as strategy maps, which form a way of providing a macro view of an organization s strategy, and provide the organization with a framework that describes strategy and points to the metrics to evaluate performance. Merchant: I think there is a lot to be learned about how people develop strategies. My disagreement with the BSC is indeed that it is too mechanistic, and too complicated for performance measurement. But I like the strategic mapping ideas. But in my view of management control, strategy is a given, the question is then how you implement these strategies in the best way. We do not tell our readers how to go about developing them. Hartmann: And then of course we have current developments in management control thinking such as Beyond Budgeting. I am always a bit afraid that such developments appear to be hypes after all, without much content. I have even introduced a new control philosophy, Beyond Beyond Budgeting, which is being copied now by some colleagues. I very much doubt the validity of the underlying assumptions of Beyond Budgeting, even if a large percentage of controllers are dissatisfied with their current budgeting procedures. Merchant: I think Beyond Budgeting is an interesting concept, but it will not have much application. The principle emphasizes adaptive planning, as everything is constantly moving. Decades of psychological research show that people only work towards concrete goals, not moving targets. Hartmann: I know, still the search for better control needs to continue, doesn t it? Merchant: Yes, I agree, and that is one reason that I look forward to discussing these issues further with our course participants in June! Arnout Druyvesteyn is Program Manager of Education at the Controllers Instituut. He took the initiative in developing this two-day course on control systems and performance measurement. MCA: juni 2007, nummer 4 23