Management Control System: Reward and Compensation,

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Executive Summary

Management Control Systems, MCS, is a set of practices widely recognized as crucial in managing organizations of all sizes. They are controls used in both private and public sectors throughout the world. MCS is described as the organizational policies and procedures used to assist organizations to accomplish their objectives and goals. MCS uses organizational resources to deliver programs consistent with its goals and objectives. An organization embracing MCS is assured of success because sound MCS safeguards it against unethical practices as they ensure apt policies and procedures crafted by the top management are properly followed by all stakeholders. Though creating effective MCS procedures is challenging in any organization, when effectively employed, an organization is guaranteed efficient control structures.

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This paper defines MCS as it applies to; reward and compensation, culture, and administrative controls. Further, the paper explores how the aforementioned MCS influences employees’ behavior and outlines the organizational situations appropriate in using them.

Introduction

Effective management control systems are essential for the success of an organization. They allow decision-makers to instill confidence in the policies and procedures they create, for the effective management of the organization’s resources. Consequently, MCS is important in the framework of the organization. They allow the organization to have more confidence in employees in relation to making decisions and taking actions consistent with the organization’s goals. When this is accomplished, the management is left to concentrate on pressing issues of the organization such as; planning, executing business strategies and implementation of operations.

The Concept of Management Control System, MCS

MCS is not a new concept in organizations; in fact, many organizations have been using the concept for over a long time. Malmi and Brown (2008) allege that it is difficult to define MCS because the term is used interchangeably. However, those who have tried to define MCS site that MCS designate the organization’s policies and procedures used to assist organizations to accomplish their intended goals. It also spells out the resources used to deliver these goals (Chenhall, 2003).

Management Control System

Culture

Collins (1982) notes that MCS, in a cultural context, is the process by which managers tend to influence employees in executing organization strategies. In this context, MCS are tools that managers use to attain objectives and competitive advantage of the organization. Malmi and Brown (2008) illustrate that culture is a control when it is used to influence behavior. He claims that every organization has its own culture, hence, for the organization to sustain growth; its culture needs to be managed efficiently (Malmi & Brown, 2008).

How culture control influences employee behavior

Argyris (2004) Illustrates that organization’s culture comprises of a shared set of beliefs, values and social norms which influence members’ thoughts and actions. Similarly, Collins (1982) points out that culture, as a management control system, is designed to assist organization defines and understanding how its culture affects the behavior and ultimately the organization’s success. The process of managing culture is viewed as an input tailored towards creating or developing strategies for managing culture as a competitive advantage for the organization (Argyris, 2004).

Malmi and Brown (2008) cite that clan, which describes the values and beliefs of the society is vital in organizations’ control and evaluation. He indicates that culture involves the behaviors of employees, specifically the managers in making decisions (Malmi & Brown, 2008)). This is because managers belong to a cultural domain, and their behavior is influenced by beliefs and values of that particular domain and the subordinates they control (Flamholtz et al., 1985), thus; a logical correlation between MCS and culture. Argyris (2004) also explains that culture affects the choice of stimulus to which an employee ascribes or it can affect any value judgment about the stimuli.

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Cultural control is also critical in formalizing and reinforcing communication channels among employees. The concept of value control, developed by Simons (1995) reinforces what we call the “belief systems” (Hofstede, 1980). Belief systems are set of organizational values that encourage managers to communicate formally and support them in providing purpose, basic values and direction to the organization. These organizational values, which managers execute, give directions that subordinates are supposed to adopt and follow (Hofstede, 1980).

Likert (1967) notes that culture control systems are essential in influencing the behavior of employees. When they are institutionalized through the belief systems, they help an organization reinforce different types of employee behaviors. This is achieved through recruiting a potential employee who subscribes to the organization’s culture, assisting in recruiting potential employees who have the ability to change their values to fit in the organization, and recruiting employees who agree to adopt the organization’s values despite having different personal beliefs. Collins (1982) notes that, an organization with explicit value statement influences the behaviors of employees. He opines that for a long time, Johnson and Johnson have had a community responsibility value statement that defines its organizational values. Hence, employees are required to behave based on this value statement because it is the expectation of the organization. This value has been designed by Johnson and Johnson to influence employees’ behavior (Otley, 2004).

Cultural control has also enhanced the organization’s visibility. Otley (2004) notes that symbol-based controls help an organization establish observable expressions. This includes; dress codes for its employees and workspace design. This helps an organization in creating a particular type of culture in the organization. Flamholtz et al (1985) cite that an organization, in view of fostering symbolism, establishes open communication space to encourage the culture of collaboration that helps in controlling employees’ behavior. Also, to enhance the culture of professionalism, an organization may need its employee to have a dress code (Flamholtz et al., 1985). Cultural control in the organization’s cultural context exposes employees to socialization process. Thus, Likert (1967) notes that this process instills set of standards and skills in an employee.

Malmi and Brown (2008) explore that personnel controls such as; selection, training, job design, placement and provision of other vital resources influence employee’s behavior. Of particular importance are selection and training. Training involves teaching new employees to follow the organization’s procedures and policies. It influences employees’ behavior because he/she is taught the values of the organization.

Culture and Organizational Situations

Various situations in an organization require the intervention of controls. Otley (2004) indicates that an organization with a matrix structure finds cultural controls beneficial. This is because a matrix organization brings some elements which require accountability using various tools of MCS. Because of complexity of matrix organizations, such as defining responsibilities scattered over geographical boundaries. Cultural controls help in simplifying these challenges.

Also, the size of the organization determines the type of cultural controls to use. Malmi and Brown (2008) indicate that using cultural controls in bigger organizations is advantageous. This is because they establish possibilities that allow the employees in the organization to adapt and share analogous changes and information. This sharing binds them towards a common goal. Similarly, cultural controls open up the organizational transparency and assist employees in understanding their roles and responsibilities. Thus, in the context of bigger organizations management is streamlined as Argyris (2004) cites they facilitate supervision, control of several divisions, entities whereas making them similar regardless of their geographical location. Hence, by comparing different parts of the organization, the management can find synergies and improve ideas.

Consequently, cultural controls are used when hiring potential employees in the organization. Because cultural controls such as personnel stipulate elements such as; recruiting, provision of vital resources, training, group-based rewards and strong organizational culture, they help organizations select employees who ascribe to organizational values. However, Macintosh and Daft (1987) indicate that this works best for smaller organizations. In bigger organizations, they do not function well because it is challenging to control every recruiting process to ensure the right employee is selected.

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Reward and Compensation Control

Bonner and Sprinkle (2002) note that reward and compensation aim at motivating and increasing the productivity or performance of employees by achieving synergy between their activities and goals, and those of the organization. Also, to inspire employees, Macintosh and Daft (1987) indicates that organizations have come up with other reasons for rewarding and compensating employees, these reasons include; distinguishing and informing core and non-core parts of the activity or task completed. Bonner and Sprinkle (2002) illustrate that intrinsic models of awarding incentives assume that higher performance requires substantial efforts and is linked to the organization’s productivity.

How Reward and Compensation Influence Employee’s Behaviour

Fishbein and Ajzen (1975) illustrate that rewards and compensations aim at motivating and increasing productivity of employees and other groups within an organization. This is achieved by linking rewards to the accomplishment of goals. Bonner and Sprinkle (2002) explain that reward and compensations are critical in controlling employee’s direction, efforts intensity and efforts duration on an assigned task. Further, Bonner and Sprinkle (2002) indicate that reward and compensation consist of base reward, performance-dependent or both. Base reward is a fixed form of reward, mostly; it is tied to the number of hours worked. Consequently, performance-dependent incentives provide motivation that assists in aligning employees’ natural self-interest with the organization’s goals. Thus, a combination of both provides the certainty of base rewards and the motivation of employee performance-dependent rewards.

Also, Merchant (1982) points out that profit sharing, where an employee receives part of the organization’s profit ultimately motivates him/her to work harder for the organization. He further illustrates that as the profit-sharing increases; the employee’s effort, skills encourage the flow of information within the organization (Merchant, 1982).

Lawler and Rhode (1976) point out that group sharing is also another area in which an employee’s behavior is shaped by an organization. Group sharing ensures employees monitor each other more easily and efficiently than the ‘horizontal monitoring’ employed by supervisors (Bonner & Sprinkle, 2002). Because group monitors each other, they internalize the positive attributes amongst, hence; this facilitates decision making and encourages cooperation in performing interdependent duties or tasks (Bonner & Sprinkle, 2002).

Reward and Compensation and Organizations situations

Govindarajan and Gupta (1985) illustrate that different situations in an organization necessitate using rewards and compensations to motivate employees. One situation is when an organization wants to motivate its employees to achieve certain goals. In this case, reward and compensation are significant as it acts as an employee motivator. Similarly, Tajfel and Turner (1979) point out that group incentive plans encourage cooperation within a group because pay is tied to accomplishing a group task. Moreover, it cultivates managerial skills within a group; hence; these skills are replicated in other groups, and the whole organization. Fishbein and Ajzen (1975) opine that group incentive plans are critical for the organization because the group’s performance is tied directly to the task completed; this ultimately helps the organization achieve its goals.

On a similar note, Lawler and Rhode (1976) cite that an organization can have a situation where employees share the gains made by the organization. This is what he calls “gainsharing” (Lawler & Rhode, 1976). In this case, gain sharing is based either on a monthly, quarterly or annually basis. Most organizations measure this gain by comparing labor costs to the value of the products produced, thus; as employees become more productive and the cost of labor decreases for a given product, the organization shares the incurred savings with the employees (Tajfel & Turner, 1979). Gainsharing motivates employees because it makes them realize the link between their efforts and the success of their organization.

Similarly, organizations have appraisal schemes. These schemes monitor and control the performance of employees. The organizations link rewards and performance schemes in certain situations. These situations include; employee improvement and performance, compensation system decision making, development and training need assessment and evaluation and validation of human resource systems and strategies (Tajfel & Turner, 1979).

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Employee improvement and performance

Organization notes that an employee’s improvement and performance is critical to the success of the organization, hence; to ensure employees are assisted in their endeavors, their behaviors are consistently checked and feedback is given. The organization achieves this by using supervisors, customers and peers.

Compensation system and decision making

This is allocating merit pay. Organizations have developed systems to motivate additional role behavior. Thus, Fishbein and Ajzen (1975) illustrate that when an organization is increasing an employee’s pay it should put into consideration the performance schemes.

Development of needs assessment and training

Because of the changing needs of the organizations, companies view that training and development of an employee are critical in achieving the organization’s competitive advantage. Hence, according to Bonner & Sprinkle (2002) training and development tend to increase the skills of an employee.

Evaluation and validation of human resource systems and strategies

This process comes into place when an organization is selecting a potential employee. It uses multiple strategies for selecting and assessing applicants. These strategies include; resume reviews, interviews, background checks and reference letters. Hence, to prove the effectiveness of these methods, one method they use is validation by embracing appraisal systems. This helps to determine the applicant’s information and her/his job performance.

Administrative Controls

Otley (2004) illustrates that an administrative control is a system that collects and uses data or information to evaluate the performance of organization’s resources. Thus, in this sense, Otley (2004) describes administrative controls, as structures and rules upon which the organization depends for its success. Govindarajan & Gupta (1985) outline three different types of administrative controls commonly used in organizations. These are; governance which is a structure within an organization, policies and procedures, and organization structure and design. Fishbein and Ajzen (1975) cite that organizational design makes employees work closely with colleagues, and streamlines administration procedures.

How administrative control influences employee behavior

For a long time, Lawler and Rhode (1976) have shown that administrative controls have played a critical role in influencing employees’ behavior in organizations. Hence, presently, controls such as clan have continued to alter how organizations relate with employees. Clan controls are systems that place greater emphasis on informal control structures. Within these systems, managers embrace traditions and beliefs to manage employees to succeed in their personal goals while upholding organization’s ethics.

Lawler and Rhode (1976) cite that rules and procedures hurt the performance of employees, thus, it leads to less commitment and increased stress levels, absenteeism, less innovation and lower job satisfaction. However, Merchant (1982) explores that rules and procedures increase employees’ work productivity because they reduce workplace conflicts and facilitate work performance. Despite these different viewpoints, Lawler and Rhode (1976) argue that formalization is either negative or positive depending on whether the rules implemented enable the employees to perform their tasks efficiently or not.

Macintosh and Daft (1987) explain that governance structure establishes a formal line of accountability and authority and designates controls such as meeting schedules and agenda-setting, and procedures and policies. These elements are used to guide an organization towards effective administration and management.

Administrative Controls and Organizations situations

Administrative Controls widely used are results and action controls; hence, in situations where organizations want to monitor their employee’s individual behavior, it uses a tight control system, thus, this results in higher chances of motivating employees to behave in accordance with the organization’s interests. Argyris (2004) indicates that top management embraces action controls that are tight, that is, action controls containing detailed reviews, constant direct supervision, and have rewards and punishment procedures to be affected to concerned employees.

Organizations have consistently anchored their survival by generating effective strategies and increasing their performance (Govindarajan & Gupta, 1985). Hence, to sustain these strategies and performance, and be competitive, they use administrative controls to generate information relevant in defining and implementing organizational strategies.

Administrative controls allow an organization to accomplish or reclaim its strategy by weighing different management horizons based on budgets, strategic and operational (Fishbein& Ajzen, 1975). In this case, administrative control functions within each horizon by embracing control that is specified on each level and bounded by the decision-making process.

Conclusion

The management of an organization involves controls, thus, MCS is essential in directing its activities. Every organization requires effective control techniques in determining how its activities are implemented. By embracing MCS such as reward and compensation, culture and administration, an organization can look and conceive elaborate reporting instruments that are aimed at allowing its managers and employees to act in realizing global coherence, economical between performance, resource and objective utilization. Similarly, once MCS is implemented, an organization can assess its effectiveness and point out areas that need more stringent controls. This will assist it to attain its goals and increase its competitive advantage.

References

Argyris, C1964, Integrating the Individual and the Organization, Wiley, New York.

Bonner, SE & Sprinkle, GB 2002, ‘The effects of monetary incentives on effort and task performance: theories, evidence, and a framework for research’. Accounting Organizations and Society, Vol. 27, pp. 303–345.

Chenhall, R 2003, Management control system design within its organizational context: Findings from contingency-based research and directions for the future, Accounting, Organizations and Society, Vol. 28, no.2, pp. 127-168.

Collins, F 1982, ‘Managerial Accounting Systems in Organizational Control: A Role Perspective’, Accounting Organizations and Society, pp. 107-122.

Fishbein, M & Ajzen, I 1975, Belief, Attitude, Intention, and Behavior: An Introduction to Theory and Research, Addison-Wesley, Reading, MA.

Flamholtz, E, Das, T & Tsui, A1985, ‘Toward an integrative framework of organizational control’. Accounting Organizations and Society, Vol. 10, pp. 35–50.

Govindarajan, V & Gupta, A1985, Linking control systems to business unit strategy: impact on performance. Accounting, Organizations and Society , Vol. 10, no. 1, pp. 51 – 66.

Hofstede, G 1980, Culture’s consequences: International differences in work-related values, Sage, Beverly Hills, CA.

Lawler, EE & Rhode, J 1976, Information Control in Organizations, Goodyear, Santa Monica, CA.

Likert, R 1967, The Human Organization, McGraw-Hill, New York.

Macintosh, N & Daft, R 1987, Management control systems and departmental independencies: an empirical study. Accounting, Organizations and Society, Vol. 12 no. 1, pp. 23 – 28.

Malmi, T and Brown, D 2008, ‘Management control systems as a package – Opportunities, challenges and research directions’, Management Accounting Research , Vol. 19, pp. 287-300.

Merchant, K 1982, “The control function of management”, Sloan Management Review, Vol.23, no.4, pp. 43-56.

Merchant, K1985, Control in Business Organizations, Pitman, Boston MA

Otley, D1994, Management control in contemporary organizations: towards a wider framework, Management Accounting Research, Vol. 5, pp. 289-299.

Tajfel, H & Turner, JC 1979, ‘An integrative theory of intergroup conflict’. In W. G. Austin & S. Worchel, Eds, The Social Psychology of Intergroup Relations, Brooks/Cole Publishing Company, Monterey, CA.

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