Practice final exam questions - example answers (2019 Autumn) PDF

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22705 Management Planning and Control 2019 Autumn Practice final exam questions and example responses Question 1 The context of an organisation has a significant influence on the design of management control systems. Identify two contextual factors and explain how and why they influence the effectiv...

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22705 Management Planning and Control 2019 Autumn Practice final exam questions and example responses Question 1 The context of an organisation has a significant influence on the design of management control systems. Identify two contextual factors and explain how and why they influence the effectiveness of results control systems. In your response, use examples from Houston Fearless 76 and Fit Food Inc. Response: There are so many different factors that affect the management control system such as Institutional environments in the manner of labor availability, quality, and mobility where it can be involved of using the action control, personal control, and long-term incentives. However, to illustrate this factor, it is relevant to consider the case of Houston Fearless 76 , the old system plan base based only on the sales where there was miss-match between the company objective and sales force, therefore the management consider the new incentives plan to increase the revenue and the growth in the light of its objectives. The management has concluded there was no linked between the efforts and rewards and that means the employees understand very well the performance and results. also, there was no accountability or punishment for salesmen who provide the overstated forecast which negatively impacts the production plan that breach timeliness where the employee should get some feedback regarding their performance. Although as the employees don’t understand how to generate the desired results in a way could beach the congruence regarding to the result control effectiveness where the measurement should be aligned to the company’s objective. on the other hand, in the case of Fit Food, the external auditing firm doesn’t prefer to provide the service for the company persistent request to cut down the auditing fee amid to solicit bids from competing firms in which also prevent the evaluation of measuring effective results based on the accounting numbers Moreover, Houston Fearless 76 in their new incentive plan where the management insisted that the bounce based on the improving the accuracy of forecast in way to eliminate the salesmen from overstating, bounce on product gross margin, and achievement of individual management objectives which are relatively based on long incentives plan in order to achieve congruent with the organization objective and to set motivations effect through the finical incentives. The second factor is regarding to Environment uncertainty that explain the barriers of economic climate, Customers, suppliers as the case of Fit Food Inc which basically explain the issue by setting sales target plan as it considers the uncertainty environment that related to the extensive competitors, financial crisis in 2008 and economic position, products changing very rapidly, changing 1

preference of the customers as a results of spreading the awareness of the health issues by which effects the demands of the dimensions of Energy Drinks and cookies in Fit Food Inc. Consequently, it was critical and challenging in the shed of this circumstance of uncertainty environment for the manager to predict or set any targets into the future. However, it is also the measure of such results can be violating the precision when the measurement inevitably not reflects the performance and accuracy such some random, some systematic issues.

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Question 2 How do incentive compensation systems influence the motivation of employees? What are some of the potential side-effects of using financial performance measures to determine incentive compensation? In your response, use examples from Superconductor Technologies Inc. and Better Beauty Inc. Response1: How Incentive Compensation Systems Motivate Incentive compensation systems help employees understand what is expected of them and encourage employees to achieve and exceed performance targets. Organisations can motivate employees through associating certain rewards or punishments based on results. They can use a variety of rewards such as: 1. Monetary rewards such as bonuses of cash or stock 2. Non-monetary rewards such as granting high-performing employees public recognition Short-term incentives can motivate employees to go the ‘extra mile’ in order to receive the reward. Long-term incentives such as stock options motivate employees to contribute to the organizations long-term success. In some situations, a company’s performance might be falling below expectations of worse it might be making financial losses. As seen in Superconductor Technologies Incorporated, the company was performing poorly. As a result, the stock options were ‘underwater’ which was a demotivating factor for employees thus management was extremely concerned about employee retention. In order to boost morale and motivate employees to focus on making the company more profitable and retain key staff, an Equity Incentive Plan was approved. It reserved six million shares to be issued to employees, directors and consultants of the company. The plan included accelerated vesting (50% in 2004 and 50% in 2005) if the company was profitable in 2003 and profits were deemed to be sustainable. Side Effects Using financial performance measures to determine incentive compensation can have harmful side effects as they can cause dysfunctional outcomes. They can create greater opportunities for corruption as they create temptations for employees to cut corners. Better Beauty Inc. builds a bonus pool based off a percentage of corporate net income each year which then gets allocated to the company’s individuals managers. This monetary incentive has the potential to create cultures of greed and short-termism. In this case, managers will direct their focus only on influencing the measured result which can mean the unmeasured results might be ignored.

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Response 2: Incentive compensation is the compensation received by the employee on the basis of their performance. It helps the employees to work hard to achieve objectives of the company and also help them to understand what is expected from them to achieve those objectives and goals. Compensation has a long-lasting impact on employees’ motivation. It is reality that, in any organisation, the productivity or performance of staff depends on their job satisfaction. The employees’ level of satisfaction is linked to the compensation packages provided to them. Employee motivation in the workplace increases their work allegiance, organisational commitment and job satisfaction. Motivated employees enables organizations to make them more competitive and as well as to increase their profit and growth. Employees are ready to work more hours due to best performance opportunities. If the compensation system is transparent and fair then the employees gets more committed to their work. As in the case of Superconductor Technologies, Inc., one of the ways to increase the motivation of the employees is that they are provided with the stock options as this will link their personal benefits to the company’s objectives to increase the share price. As from the case STI failed to achieve its revenue plan so there was salary cut of 10% for the top 10 executives and also no bonuses were paid at the end of the year and all the stock options previously granted were underwater. This led to the fear of employee retention for the company. As for the side effects of the financial performance measures, the employees may take unethical and immoral paths to achieve them. When employees are rewarded on the basis of the achievement of goal then they are more likely to take unethical path, such as they will overstate their performance so as to achieve more financial benefit. When reward is based on performance, many employees choose the easiest or shortest path in achieving those rewards, this may lead them to deviate from their moral grounds. Besides promoting bad behaviour, financial incentives have the cost of generating pay inequalities that can lead to a decrease in employee retention and damage efficiency. When the financial incentives are paid on the basis of performance, both the managers and employees on the same level receives different compensations. But it is noted that the employees often measure the fairness of pay by comparing it to their peers rather than in absolute terms. As a result, employees’ feel jealous, frustrated, disappointed and retention. So as to keep balance there should be both financial and non-financial performance measures, so as the employees’ feel as they are treated fairly and just. As in the case of Better Beauty, pre establishment of the bonus pools as per the corporate net income led to the inequality and lack of motivation as a result of the employees giving up to the facts that they were not able to directly in fluence the results.

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Question 3 Organisations pursue different types of strategies. Discuss how the choice of strategy influences the design of the Balanced Scorecard. In your response, use examples from the Mobitel case, presented in Sandelin (2008) and Johansen’s—The New Scorecard System. Response 1: The design of balanced scorecard depends on different strategies of the organisation, which influence how many dimensions an organisation has on their balanced scorecard. Organisations can have as little as 2 or 3 dimensions or as many as 7 or 8 dimensions. Strategy has been shown to be a key issue with the balanced scorecard, as not all organisational strategies are the same and so the dimensions to be measured are required to change to align with strategies of the organisation. The use of strategy to influence the balanced scorecard is evident in both Johansen’s and Mobitel’s cases. In Johansen’s case, management have expressed that providing premier customer service was at the heart of Johansen’s, and so to maintain its position in the market, they implemented the balanced scorecard. Based on this, the four dimensions on the new balanced scorecard were: financial, customer service, leadership and strategy. These 4 dimensions reflected organisational goals, and would prove to be more effective than the previous focus on only financial performance. Comparing Johansen’s strategy to Mobitel, it is clear why these two firms have very different dimensions on the balanced scorecard. Sandolin (2008) emphasizes Mobitel’s focus on profitability, liquidity and growth. As there was less focus on customer service compared to Johansen’s, indicators implemented were result orientation, payback time calculations, accountability. These dimensions were implemented by management to address management goals of operational efficiency, liquidity and profitability. It can be observed how these dimensions are very different to Johansen’s as a result of Mobitel’s differing strategies in place which resulted in different dimensions from a financial, customer, internal process and learning and growth perspective. Therefore it can be emphasised that organisational strategy influences the design of the balanced scorecard as there is no one size fits all scorecard, and each balanced scorecard is adjusted to suit organisational goals. Response 2: The measurements used in the balanced scorecard should reflect the company’s strategy. This was clearly evident in the Mobitel case where during the early stage of the company, the company was more focused on developing new technology and make it available to customers as soon as possible. The measurements used for results control were primarily operative non-financial indicators, such as website downloads, time spent on websites. Those measures had no direct link to profit but served as means of understanding how to maintain customer loyalty. Later in the case when Mobitel got into financial distress, the company’s priority shifted from developing new technology to survival. The performance measurements focused on efficient delivery 5

of products and services that provided steady cash flow to the company. The budget-actual-variance to target approach was also adopted to hold managers accountable to the variance to expected performance outcome. Whilst the company still tracked non-financial performance indicators, they are no longer part of the performance target but served as way for company to learn more about the cost structure. In the Johansen’s case, prior to 2012, store managers’ performance was measure based on key financial metrics, for instance, same-store sales growth, gross margin and net income. A lot of effort was invested in cost-cutting to improve profitability potentially at the cost of compromised customer experience. When the company’s financial performance faced difficulties again in 2012, the management was concerned about losing its key differentiator – superior customer experience. The key strategy for Johansen changed from cost-cutting to improve customer service. This was achieved by including customer satisfaction score as one of the key measurements.

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Question 4 What control problem(s) do results controls attempt to address? Discuss the problem of myopia in relation to results controls. What are some of the ways in which managers attempt to address myopia? In your response, use examples from Superconductor Technologies Inc. and Harwood Medical Instruments PLC. Response: Results controls seek to address three control problems in management: lack of direction – through letting employees know what is expected of them, lack of motivation – through rewarding employee performance by means of incentive compensation plans, and personal limitations – through encouraging employees to upskill themselves in order to perform better. Of these three, motivational rewards are often linked to performance measures. As a condition for results controls effectivity, the control must be measurable. Most companies use financial metrics to evaluate compliance on results controls. However, these metrics often lead to myopia, most especially when metrics are focused on the short-term goals. Two common types of myopia are investment myopia and operational myopia. Employees may be attracted to pursue actions that are inconsistent with the goals of the company if performance is just based on generating short-term accounting returns. Managers may try to manipulate sales numbers to fulfil its targets and receive their incentives. Risk aversity may also hinder managers from pursuing high value investments as they’re only concerned on producing short-term numbers. Nevertheless, myopia can be avoided by considering non-financial performance measures and introducing long-term rewards. This is the case with Superconductor Technologies, Inc. In order to deter behavioural displacements from its employees, the company introduced nonfinancial measures, such as accomplishment of project milestones, workplace safety and employee retention, in their performance evaluations and reward structure for them to value not just their individual interests but also the company’s interests. The equity incentive plan, which is a long-term employee benefit, has also been revamped to keep key personnel and to encourage sustainable profitability and goal congruence among its employees. For Harwood Medical, myopia was addressed by incorporating value drivers to its incentive package. On-time deliveries, patent applications, and consumer satisfaction were included in the scorecard to generate a balance between financial and non-financial metrics that the company believes will enhance performance.

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