Evolution of MCS
Organizational life cycle theory presumes that start-up ventures move through developmental stages as they evolve from start-up to maturity. Organizational structures and management control systems tend to evolve as the organization develops.
New organizational structures are developed with the objective of creating more advanced control instruments so as to enhance the ability to control evermore complex processes .
Thus, there is evidence to suggest that the number and types of controls instituted is correlated with the company size, number of employees, and years in operation.
Start-Ups:
Organizations start as simple forms where the owner/entrepreneur exercises centralized authority reinforced by close personal supervision. Planning and control are exercised without formal structures or systems, and parameters are set for the amount of discretion that can be exercised by subordinates.
Procedural control or formalization:
Successful start-ups typically reach a point where the demands of growth and size require that informality and looseness give way to a set of systems and structure.. At this stage in the evolution of the organization, behavior is sought to be controlled through policies and plans designed to prescribe correct or expected action.
Formalization facilitates greater delegation and lessens the need for close supervision. Greater individual effort may follow as delegation permits a higher degree of individual freedom, discretion and control.
Functional Departments:
With the development of larger, more complex organizations seeking scale economies, control comes to be exercised through professionalized management and a bureaucracy.
This had provided the advantage of division of labour based on skill requirements which in turn brought about increased efficiency in individual functional departments. Standardization of work-related policies is introduced along with the formal programming of behavior. Responsibility for behavioral control and control of outputs is delegated to individuals according to their level within an increasingly hierarchical structure. This implied the onset of bureaucratic framework.
Bureaucracy was appropriate for the industrial age in that well-delineated lines of command, organizational structures, and areas of responsibility, authority and accountabilityallowed for specialization by function and the exploitation of economies of scale.
However managers in different departments tend to develop their own departmental identities and philosophies. Decisions become increasingly based on departmental rather than organizational goals and a parochial outlook makes coordination more difficult. It has lead to conflict in priorities among the departments. Hence in functional organization, strategic planning and control gets concentrated at the top management
Strategic Business Unit (SBU): Starting in 1920, companies became too large and diversified to manage under a traditional, pyramid organization. The firm, then adopt appropriate organizational structure and change their control strategy. Hierarchies are replaced by flatter structures. The solution was decentralization via the creation of organizational divisions that performed some functions independently of the company headquarters. This strategy was successful until 1960, when growth of profits stagnated. Given strategic direction from headquarters, some divisions could not adjust to their markets while others were stuck in low growth areas. Conglomerates needed to become more agile to respond quickly to changing economic or market situations. Further, as firms focus becomes increasingly market oriented, conglomerates needed to become more agile to respond quickly to changing economic or market situations
In 1970, GE pioneered the introduction of a new, different approach based on strategic business units. SBUs are essentially autonomous division or organizational unit, small enough to be flexible and large enough to exercise control over most of the factors affecting its long-term performance
Once a firm sets up SBUs, they develop their own strategies. They analyze their competitive position in their market, they develop products that respond to the needs of their customers and they evaluate their performance. They still report back to company headquarters but operate as independent businesses (or mini companies) organized according to their target markets. They are organizationally complete and separate units. Functional departments come under the operational control of the business unit manager.
Both the freedom to innovate and management control are enhanced by granting autonomy limited by clearly stated laws and an effective justice /reward system.
Business Process Outsourcing:
A more recent trend is that of assigning all Non-core activities to outside agencies for execution (and control). Business Process outsourcing is an attempt on these lines. The company seeks to achieve maximum efficiency in accomplishing its strategic objectives while at the same time save on its control efforts on functions that have been identified as non-core and thus assignable.
Control Sytems and the External environment:
In addition to the internal demands of an ever-larger and more complex organization, control systems must also reflect the changing external environment. As the external environment becomes more complex and dynamic, uncertainty increases, and the appropriate organizational structure and control strategy changes. As task uncertainty increased, coordination by programming and hierarchical means are substituted by horizontal communication channels.
Dynamic environments tend to lead to adaptation facilitated by less formal controls. Govindarajan concludes that "as tasks vary in uncertainty, the behaviours necessary for effective performance also vary; further, since different control systems induce different behaviours, superior performance can best be achieved by tailoring control systems to task uncertainty". The effectiveness of formal controls may be limited in situations of uncertainty, while the use of social or informal mechanisms becomes more appropriate
Domain of Management Control Systems:
Many different definitions surround the idea of management control or organizational control as earlier researchers had chosen to call it. The theme, however, has remained fairly common. That is Goal Achievement.
Earlier on Anthony viewed control as a process by which management ensures that an organization carries out its strategies effectively and efficiently. This view has found agreement with many researchers on the subject.
Expanding Domain:
The fact that there are multiple ways of approaching the control concept has lent it a certain ambiguity, with the literature offering alternative definitions and completely different approaches. There are numerous definitions of the control concept, each adding new
viewpoints as new elements are seen to be relevant.
Earlier on, management accounting and management control have long been viewed as practically synonymous concepts, since accounting provides a language capable of including all areas of organisation and it has always been attributed with a considerable decision-making orientation, which is especially true in the case of management accounting. This mechanistic and formal control fits the goal achievement objective of managerial control.
In order to surpass the limitations of mechanistic systems, approaches have to be developed in which the passive, rational behaviour of individuals is substituted by a greater consideration for the organisational and motivational factors that influence behaviour, accepting that the crucial aspects for the design and implementation of the control systems are not limited solely to those of a formal nature.
By 1988, Anthony’s definition of management control as ‘the process by which managers influence other members of the organization to implement the organisation’s strategies” included behavioural overtones having sociologic impact.
Subsequently, while organization theorists have focussed on information flows, the cybernetic school stressed feedback and measurement. Independent environmental and company variables and their influence on control tools used by managers have also been researched as distinctive features of control systems.
Divergence in Views:
There appears to be some divergence in the views adopted by prominent experts in this field. Joseph A. Maciariello and Calvin Kirby defines Management Control both as Control of Strategy and Control of Operations. This is contrary to the position taken by Robert N. Anthony who tried to demarcate the boundaries of task control, operational control, and management control.
Maciariello and Kirby also held that as it is concerned with the design of Management systems used to steer the organization towards its purpose, it includes aspects of planning organizing and leading functions of management. This is in divergence to the views implied in William Newmans definition. Newman considers the domain of control systems to be the control function of management and believes “Control is one of the basic phases of Managing along with planning organizing and leading”. Each phase is thus viewed as being distinct
Conclusion:
There are multiple frameworks to look at the management control process depending on the areas from which researchers have explored management control.
What is MCS ? Why do we need it?
“However Laudable strategic intentions may be, if they do not become a reality, they usually are not worth the paper on which they are written.”
The statement points to the significance of implementation of these strategies by the Management. Effective & efficient implementation is achieved by the management through the introduction of controls that are systematic .In order to have a proper understanding of the nature of MCS, we then need to have a closer look, at the individual concepts of Management, Systems & Control .
Management:
An old but very popular definition refers to the term management as the ”art of getting things done through others.” This has become a very popular definition of management for several reasons. Mostly it is because of the fact that, this definition is very simple and easy to understand. Also, it highlights the indirect nature of a manager's job. A manager does not operate a machine or sell a product himself. Rather he guides others in producing and selling goods and services.
The above definition is, however, inadequate for the present day concept of management. It suffers from many drawbacks. Since the days of F.W Taylor management has become a science based on certain fundamental principles. . Apart from other inadequacies in this definition, it fails to reveal the functions of a manager and the skills used for getting things done.
The Functions of Management, such as Planning, organization, Directing, co-ordinating, Motivating and controlling etc are all aimed at achieving organizational goals effectively and efficiently. This also involves the influencing of behaviour of its people and also ensures optimum utilization of its resources.
Management may have different hierarchies, each level responsible for different tasks. Senior Management (Board of directors) are responsible for Strategic planning, Goal setting and laying down Policy matters. Middle management are involved in strategy implementation, setting objectives, monitoring and analyzing performance and providing feedback to senior management. Junior management on the other hand are associated with supervision & execution of operations. These hierarchies may be identified within any structure of the firm or its Strategic Business Units where additional strategies or sub-strategies are formulated and implemented.
System:
A common feature of any system is that it represents a holistic or complete entity comprising of a number of components working together towards a common objective. The components are arranged and interact in a systematic manner so as to give almost the same result in every execution turn of the system. For most structured problems system provides an assured solution.
In business a system is a prescribed way of doing something
Characteristics of a Control System:
The term control is used in management parlance in a cybernetic sense, that is to say, as a self-regulating mechanism with the following sequence of actions, which are essentially the elements of the repetitive control process as follows:
1. Setting Goals and performance measures
2. Measure Achievement
3. Compare achievement with goals
4. Compute the variances as a result of the preceding comparison
5. Report the variances
6. Determine the cause of the variances
7. Take action to eliminate the variances.
8. Follow up to ensure that goals are met.
Control Object
A control object is the variable of the systems behaviour chosen for monitoring and control. The choice of the control object is the most important consideration in studying and designing a control system. Variations in the status of control object i.e., its behaviour become the stimuli which trigger the functioning of the control system. Without these variations the system has no reasons for existence.
Detector
The detector tracks the performance and can be visualised as a scanning system and it feeds on information. In fact the detector is another name for Management Information System (MIS).
Comparator/Assessor
The output of the scanning system constitutes the energizing input of the comparator. Its function is to compare deviation of the control object from the pre-determined standard or norm the deviation become input to the activating system.
Effecter
The effecter is a true decision maker. It evaluates alternative course of corrective action in the light of the signifi cance of the deviations transmitted by the comparator. On the basis of this comparison, the systems output is classifi ed as being in control. If out of control it initiates corrective action.
Communication Network
These are devices that transmit information between the detector and the assessor and between the assessor and the effecter.
A pressure cooker is a good example of self-regulatory control system. When the pressure in the cooking vessel rises above the set limit, the ‘weight’ lifts up to let out the extra pressure out of the vents on the top of the lid till the pressure stabilizes at the set limit. Thus in the pressure cooker control is automatic.
Organisations function by and through people. Hence, unlike mechanistic systems, control system in organization have to contend with behavior of diverse personalities and thus management control is not automatic. Further goal congruence requires the coordination of groups of people in the organization.
The Cybernetic Paradigm:
Mr. Stafford Beer has given three principles governing control functions in cybernetic system.
1. In implicit controllers there is CONTINUOUS AND AUTOMATIC COMPARISON of some behavioural characteristic of the system against a standard. Further there is CONTINUOUS AND AUTOMATIC FEEDBACK of corrective action.
2. In implicit controllers control is SYNONYMOUS WITH COMMUNICATION. Control is achieved as a result of transmission of information. Thus to be in control is to communicate. Control and communication are two sides of the same coin.
3. In implicit controllers, variables are brought back into control IN THE ACT OF AND BY THE ACT of going out of control.
Example:
The cybernetic paradigm of the control process can be diagrammatically represented as under. The term cybernetics is derived from the Greek word “Kybernetes” which means ‘steersman’. A steersman is a person who directs a ship and corrects deviations from planned course of action as they occur.
An adaptive cybernetic system is structured to i) To exact information from the environment ii) Form and adopt Goals iii) Select and emit Goal directed behaviour iv) and learn to adapt.
Scan Process:
Each manager scans the environment, formally or informally, to absorb information or feedback pertaining to its condition. The environment include the “outside world” ( The External environment as well as the organizational units internal to the firm. These would include Goals, strategies, policies decisions and Management styles of its superior responsibility center.
The Manager comes into contact with the environment through the sensors. Sensors are mechanisms used by the managers to collect data. The include structured reports ( Formal) and ”informal reports”, that come to his attention through his sense of hearing and seeing.
Construct Factual Premises:
By passing data through a cognitive process, referred to as perception, the manager is able to extract information from data and interpret the meaning of that information. Thus the manager constructs certain beliefs or factual premises concerning its performance and the state of the external environment. However due to cognitive limitations t decision makers are not able to asimilate all data in the environment. So the decision maker uses past experience, organizational goals, and personal aspirations to arrive at these beliefs about the actual state of the environment.
Compare & Determine Gap (if any):
The manager compares the factual premise with the organizational goals. The Comparator represents the comparative process. The goals themselves are the result of past learning concerning performance and achievements. They represent the decision makers desire, that is Value Premise. When there is a difference between the factual premise and the Value premise, they are motivated to search for courses of action to close the gap.
Behavioral Choice:
The choice of the course of action leads from amongst a set of alternatives is referred to as Behavioural Choice. A set of alternatives, which have been successful in solving similar problems in the past, is suggested from the decision maker’s behavioural repertoire which is a function of the organizational goals, past experience, and the decision maker’s factual premise.
Satisficing:
If no alternative is expected to reduce or close the gap, the decision maker will expand the search process. The search process ,which is motivated by the presence of a gap,will stop when a feasible alternative is found that will close the gap. This decision-making procedure is referred to as satisficing
Effector (Implementor): A manager activates the decision, thus serving as a change agent. Control is brought about by this manager who next seeks to determine the effects of his action. This new information is referred to as feedback. If the new behaviour leads to reduction or closure of gap, the behaviour is likely to be repeated .
Effect of Feedback: It has the long term effect of producing learning in the organization.
· Goals and performance measures adapt to actual performance.
· Search and decision rules adapt to experience
o Those found effective in the past being used under similar circumstances in the future
o Those found least effective being droppedfrom the behaviour repertoire
Ultimate Gap closure: The process is repeated if the goals are not achieved. If after repeated attempts the goals are not achived, the manager will either alter the performance measures and thereby the factual Premise or reduce his goals. In either case the performance gap is ultimately closed.
Robert Anthony & Vijay Govindarajan’s view of Management Control:
The learned authors have,in 2007, defined Management Control as Robert N. Anthony Anthony (2007) defined Management Control as
“The process by which managers influence other members of the organization to implement the organization’s strategies. “
“Management control systems are tools to aid management for steering an organization toward its strategic objectives. Management controls are only one of the tools which managers use in implementing desired strategies.”
Relating system to organizational objectives
Management Control System (MCS)
Joseph Maciariello & Calvin Kirby have defined M.C.S. as follows
MCS is a set of inter-related communication structures that facilitates the processing of information for the purpose of assisting managers in coordinating the parts and attaining the purpose of an organization on a continuous basis. They view “the entire organization as a control system. ‘Control’ is seen as a characteristic of a control system; it occurs when the organization is attaining its purpose. Purpose and attainment of purpose are central to the work of control system.”
Thus Maciareillo and Kirby include both Control of strategy and Control of operations in the definition of M.C.S. A good management control framework, implemented properly, will enhance organizational adaptability, accelerate productivity and enhance competitiveness.
Purposes of MCS, according to them are
1. Coordination of parts of organization
2. Steering those parts to achieve organizational goals.
3. Bring along unity out of the diverse activities of an organization.
Informal Control Systems
1.2.1 Management Style & Culture
Management Style may be summarized as a continuum between highly autocratic or external style or Theory X Style and highly participative or internal style or Theory Y style.
In the external style there is:
a) Centralisation of authority and decision making and lower levels of management have to strictly comply with the formal procedures laid.
b) The organization structure is pyramidal in nature
c) Detailed formal planning and control systems are formulated which are rigid in nature
d) There is strict supervision and guided tight control.
e) There is no freedom given and no empowerment at lower level.
f) Rewards and incentives are used effectively to motivate employee
This system does produce results, but it may demotivate employees who like to have more freedom in the works environment. Further it may thwart the innovative spirit. The intense competition amongst employee may even create a tense atmosphere in the organization which may not be conducive to long term growth.
However in case the employee are very subservient and not enterprising, this style may suit such organization.
The classic illustration of this external style was the one practiced by Harold Geneen of ITT in U.S. with a highly centralized tight central system. He personally made detailed evaluations of the performance of business units instead of monitoring the overall performance only, leaving the details to the unit managers.
Internal Style: The internal style is participative in nature and employees are given the freedom to offer suggestions, come out with innovations and take part in the decision making process.
There is thus:
a) Decentralization of authority i.e., bottom-up approach
b) The organization structure is flat
c) Rules and procedures are flexible
d) There is empowerment of employee which may encourage their creative spirit to blossom
e) The organization promotes commitment and self-control rather than thrusting a stifl ing control on employees
In this style of management there may be a tendency on the part of some employees, who are not self motivated, to be passengers, without making any positive contribution to the organization.
There is also the danger of each employee going his own way resulting in chaos, and to avoid such eventuality suitable coordinating mechanism must be in places. Moreover, the individual behavior must be goal-congruent with that of the organization.
John Chambers of CISCO practiced a participatory approach and encouraged his employees to lead, make good decision and take risks willingly
Jack Welch the legendary CEO of General Electric was an autocratic leader in his early career, inviting the nickname of “Newtron Jack”. From 1990s he transformed his style into one of involving people in decision-making and making use of the brain of every worker. His ambitions goal was to remove the “boss element” for G.E and to make it a boundary less organization. Jeff Immelt who succeeded Jack Welch in 2001 is adored by everyone in G.E. for being a friendly likeable leader, with a proven track record.
In India, Infosys is a typical example of a company practicing a democratic approach in management.
Toyota is well-known for its philosophy of encouraging employees to come out with suggestions for improvement and rewarding them.
Mixed Style This is a composite of both the above styles, blending the advantages of each, without their drawbacks. Human nature being what it is, proper functioning of any organization requires suitable checks and balances. A control style based exclusively on intrinsic motivation seems to be naïve. A rigid authoritarian style, cast in a rule-bound framework, may be a noose round the organization Murugappa group is a good example of this modified style of management. While the Board lays down the major policies and broad guidelines the professional divisional managers are given total freedom to attain the organizations goals.
Management Culture
Culture consists of shared values, beliefs and norms of organization which grew over time based upon the assumptions of what it takes to be successful. While management style is associated with individual managers, corporate culture is pervasive and is an organizational concept.
Culture facilitates cooperation & communication within the organization; however, if the beliefs are not consistent with the needs of business, dysfunctional consequences may follow. A shared belief also ensures greater commitment of the employee to the organization. BSNL’s complacent culture in a monopolized environment had to undergo a radical shift to a market oriented approach when the telecom sector was de-regulated.
Key themes or dominant values shape the organization culture
a) A belief in the importance of people as individuals and in their ability to make
a strong and effective contribution ( Eg. Infosys & Intel)
b) A belief in superior quality and service (eg. I.B.M)
c) A belief in cleanliness & quality (eg M.T.R &McDonald)
d) Belief in innovation (eg 3M)
Infrastructure :It is necessary to design a proper control system infrastructure encompassing organization structure, responsibility centers, performance measures and rewards. A formal organization structure is a communication structure that is established to process information for the purpose of attaining the goals of the organization. An organization’s ability to achieve and maintain control is directly proportional to its information processing and communication capability. The development in the information processing field have accelerated this capability..
Organization Structure
A fi rms’ strategy has a major influence on its structure. The type of structure in turn infl uences the design of the organization’s management control system. Organization structure can be grouped into three general categories.
1. Functional Structure
2. Divisional Structure
3. Matrix Structure
Functional Structure:
In this structure, each manager is responsible for a specifi ed function as Finance or Marketing. The diagrammatic representation of this structure is as follows
The rationale for the functional form of organization involves the notion of a manager who brings specialized knowledge to bear on the decisions related to a specific function, as contrasted with the general-purpose manager who lacks specialized knowledge. A skilled marketing manager and a skilled production manager are likely to make better decisions in their respective fields than would a manager responsible for both functions.
Advantage:
A specialist manager should be able to better supervise his subordinate manager & workers. Thus this structure brings about efficiency in its operations.
Disadvantages:
1. There is no way of ascertaining without a shadow of doubt, what fraction of profit was contributed by each function, and thereby determining the effectiveness thereof.
2. Similarly, at lower levels, there is also no way of arriving at the profit contributed by the several production departments, for instance.
3. Disputes at the very lowest level between personnel attached to different functions can be resolved only at the top. For example, marketing manager may want to satisfy the requirement of an important customer, which involves extra costs in terms of overtime, re-scheduling costs etc which the manufacturing department may be unwilling to incur. Dispute resolution thus becomes costly and time consuming.
4. Functional structures are inadequate for a firm with diversified products, as the notion of a manager bringing in specialized knowledge to bear on the decisions related to a specific function, is not applicable – Diversified products, would imply diverse specialized knowledge.
5. Functional organizations tend to create ‘silos’for each function ,thereby preventing cross-functional co-ordination in areas such as new product development.
(This problem can be mitigated by supplementing the vertical functional structure with lateral cross-functional processes such as job rotation and team based rewards)
Divisional Structure
In this structure each of the decentralized division operates as a complete business unit in itself, like a semi-independent part of the company. The diagrammatic representation of this structure is as follows:
This structure helps the firms to be more market/customer-focused when the fi rm is engaged in unrelated product businesses. Full authority and accountability is given to the head of divisions as a separate profi and/or investment responsibility center.
Structure produces greater managerial motivation to run their own business within broad company policies, thus acting as a good training ground for leadership.
Matrix Structure
Matrix Organisation Structure combines the coordination and control of the decentralized structure with the technical excellence economies of scale of the functional structures to reap the benefits of both. While managing complex programs as in large high-technology programs, complex products and services and multinational business, organization face several coordination problems. A matrix avoids such problems as the total responsibility for achieving the goals and objective of the program lies with Program Manager but must share resources from the various functional heads. The functional managers assigned to the projects are administratively reporting to the Project Manager but functionally to the Function Head.
The distinguishing feature of the matrix structure is thus the dual dimensions of management embodied in it.The structure of a Matrix Organization is given below:
The outputs produced by the organization may be identifi ed in the rows of the matrix while functional inputs utilized by each project may be identifi ed in the columns of the matrix. The total outputs of the functions are found in the last column of the matrix.
Though the Project Manager assumes full responsibility for delivery of a product which meets performance specifi cations he does not have direct authority over the functional organization that actually performs the work. The functional personnel thus operate under the knowledge-based authority of the function and the resource-based authority of the Project Manager. This may create a friction in the course of the work but it is up to the Project Manager to use it as a creative friction to further the goals of the program.
b) The matrix organization structure is suitable for projects which are not large enough to warrant a fully decentralized set-up, with all functional managers under each project. Decentralization may result in loss of scale economics, by way of duplication of functional services for several projects. The matrix structure is suitable for projects of short duration.
c) (i) Advantages:
1. Ensures better coordination and control of the decentralized structure along with achieving technical excellence and economies of scale of the functional organization.
2. Fosters creativity and multiple sources of diversity
3. Broader middle-management exposure to strategic issues of the business
4. Acts as a good training ground for future leaders.
(ii) Disadvantages:
1. Dual accountability as explained above, which may create confusion
2. Necessitates tremendous horizontal and vertical coordination
3. Difference in orientation between Program and Functional personnel. The functional person may aim for high technical performance not warranted by project requirement
4. Diffuse responsibility As responsibility is distributed between program and functional personnel becomes diffi cult to administer system of accountability, leading to potential conflict
5. Program personnel may have a sense of insecurity as soon as a project is completed and this may lower their morale
6. The design of the reward structure for program and functional personnel is a ticklish issue which should be worked out in a fair and transparent manner to satisfy all.
The main consideration in design of organization structure are
· Functional Dimension
· Product Dimension
· Geographical Area Dimension
The basic problems in design of organization structure are
· Ensuring functional excellence
· Ensuring coordination
· Ensuring control
· Recognizing behavioural issues
The evolution of different structures associated with corporate stages of development are noted below:
Controls for Differentiated Strategies
Robert Anthony & Vijay Govindarajan have given controls appropriate under different strategies which are reproduced below:
Different Corporate Strategies: Organisational Structure Implications:
Control Process
This covers the management accounting tools such as capital and operational budgets and reporting systems which are covered under other Study Material/s.
Coordination & Integration
To ensure that all the sub-units of an organization work in sync with each other it is imperative to have institutional mechanism for coordination. This is done through constitution of Committees for strategies & operational issues. There can be no substitute for face-to-face interaction amongst members of an organization. There could also be contacts with each other through e-mail & telephone.
Rewards
Rewards are a major motivational tool to secure the participation of individuals to achieve organizational goals. They are also an important source of communication and feedback. They communicate just what the fi rm values and just how valued an individual is to the fi rm. The feedback or rewards may be positive, seeking to reinforce and encourage certain behaviors or negative, seeking to alter behaviour to a more desirable pattern.
Reward system should blend the interest of individuals with that of the institution to ensure goal congruence. The system should be transparent and be perceived as fair.
An effective reward system requires
• Establishment of goals
• Performance measurements, fi nancial and non-fi nancial
• Rewards criteria
The rewards can be monetary or non-monetary.
Monetary rewards are salary, benefi ts and incentives. The incentives may be individual or group incentives.
It could be short-term based on excellent performance in the current year or long-term through Equity Stock option plans. Such plans boost the morale of the employee and fosters a sense of belonging to the organization.
Apart from the foregoing factors, the reward system must be designed differently for the different levels of management. The compensation plan of Nucor Corporation, USA, serves as a good illustration.
Compensation
Nucor provided employees with a performance-related compensation system. All employees were covered under one of four compensation plans, each featuring incentives for meeting specifi c goals and targets.
1. Production Incentive Plan
This covered most Nucor workers. Under this plan, employees directly involved in manufacturing were paid weekly bonuses based on actual output in relation to anticipated production tonnages produced. The bonuses were paid only for work that met quality standards and were pegged to work group, rather than individual output. (Each work group contained 25 to 40 workers.). Once the standard output was determined, it was not revised unless there was a signifi cant change in the way a production process was performed due to a source other than the workers in the bonus group.
Bonuses were tied to attendance and tardiness standards. If one worker’s tardiness or attendance problems caused the group to miss its weekly output target, every member of the group was denied a bonus for that week. “This bonus system is very tough,” said Iverson. “If you are late, even only five minutes, you lose your bonus for the day. If you are thirty minutes late or you are absent for sickness or anything else, you lose your bonus for the week. Now, we have four forgiveness days per year when you might need to close on a house or your wife is having a baby, but only four.”
Maintenance personnel were assigned to each shift, and they participated in the bonus along with other members operating on that shift; no bonus was paid if equipment was not operating. Production supervisors were also a part of the bonus group and received the same bonus as the employees they supervised. The weekly output by, and bonus for, each work group were displayed at the front entrance to the factory. While there were no upper caps the production incentive bonus, in general averaged 80 to 150 percent of the base wage.
Iverson gave an example of how this plan worked: “In the steel mills, there are nine bonus groups: three in melting and casting, three in rolling, and three in fi nishing and shipping. Take melting and casting, for example. We start with a base of 12 tons of good billets per hour: Above that, the people in the group get a 4 percent bonus for every ton per hour. So if they have a week in which they run, say, 32 tons per hour – and that would be low – that’s an 80 percent bonus. Take the regular pay, the overtime pay, everything, multiply it by an additional 80 percent – and we give them that check along with their regular check the next week.
2. Department Manager Incentive Plan:
Nucor’s department managers oversaw the production supervisors and, in turn, reported directly to the general manager of their plant. They earned an annual incentive bonus based on the performance of the entire plant to which they belonged. The target performance criterion here was return on asserts.
Every plant operated as a stand-alone business unit. All the plants had the same performance target:
A return of 25 percent or better on the assets employed within that plant. In recent years, bonuses averaged 82 percent of base salary.
3. Senior Officers Incentive Plan:
The designation “senior officers” included all corporate executives and plant general managers Nucor senior officers did not have employment contracts, nor did they participate in any profi t sharing, pension, or retirement plans, their base salaries were lower than those received by executives in comparable companies. Senior offi cers had only one incentive compensation system, based on Nucor’s return on stockholder’s equity above certain minimum earnings. A portion of pretax earnings was placed into a pool that was divided among the offi cers. If Nucor did well, the offi cer’s bonuses, in the form of stock (about 60 percent) and cash (about 40 percent), could amount to several times their base salaries. If Nucor did poorly, an offi cer’s compensation was only base salary and, therefore,signifi cantly below the average pay for this level of responsibility.
During a slack period in the 1980s, Iverson was named the Fortune 500 CEO with the lowest
compensation. He saw this as an honor. “When I walked through a plant during that period of time when we had to cut back to a four-day work week, or even three-and-a-half days. I never heard an employee who complained,” he said. “His pay may have been cut 25 percent, but he knew that his department head was cut even more and that the offi cers were cut, percentage wise, even more than that. I call it our ‘share-the-pain’ program…. I think in 1980 I earned $ 430,000. In 1982, I earned $ 108,000.
Management should take the biggest drop in pay because they have the most responsibility.
Behavioural Implications of Control System:
Control system exerts considerable influence on the behaviour of individual in an organization.
We have already seen the impact of managerial style on behaviour The impact of control system on human behaviour is best illustrated with the help of examining one type of control, say, budgetary control. The budget process affects behaviour in three aspects
a) Formulation of budgets
The budgeting process may be top – down, determined wholly by top management. This may engender a feeling of budgets being thrust upon employees who perceive them as pressure devices; as a result their full enthusiasm may not be forthcoming in implementing it. In case the budget is formulated with a bottom-up approach, involving employees, commitment for meeting the budget can be assured.
b) Fixing targets
Sales production and other targets that are fixed should be challenging but attainable so as to bring out the best efforts of individuals. If targets are so high, as to be unattainable, it may be de-motivate employees: in some cases it may also lead to manipulation of data to ensure conformity with budget.
However such manipulations will have adverse effects in the long run. A common practice is far sales manager to dump stocks on their dealers at the year end to meet sales targets, perhaps giving unduly long credit.
c) Evaluation of performance
The evaluation of performance should be done in a constructive manner and not in vindictive style. While variances may be thrown up by the system, the causative factors may not be known readily. Hence it is necessary to analyze the reasons for variance and ensure proper accountability.
Budget as tool for coordination
Budget is not only a tool for planning in control but more importantly a means of ensuring coordination between the different departments of organizations. Thus if marketing demand is more than production capacity, ways for increasing production by working more shifts or sub-contracting may be explored. After looking at several scenarios the best option is chosen, reconciling the conflicting interest of all concerned and the entire organization operates on the same wavelength. Inter departmental conflicts are avoided.
Rewards
Rewards are powerful motivational tools. However if the reward is perceived to be unfair or not transparent, it may have a demoralizing effect. The history of companies like Worldcom, Enron, Tyco etc have shown how CEO’S actuated by greed, manipulated and artificially boosted profits and share prices by resorting to dubious accounting practices to maximize their individual earnings, which ultimately led to the collapse of the companies.
Budgets may lead to waste
Waste may arise as managers adopt the view “ we had better spend it or we will lose it. This is often coupled with ‘ empire building’ in order to enhance the prestige of a department.
