Chapter 12: Financial Results Controls in the Presence of Uncontrollable Factors

Question 1

What is the controllability principle?

Answer 1

Only hold people accountable for what they (can) control.

=> no punishment / reward for bad / good luck
=> many important result measures are only partially controllable

• vast majority of employees is risk averse
  => performance dependent rewards need to stem directly from their efforts

Question 2

What are the types of uncontrollable factors?

Answer 2

1.) Economic and competitive factors
2.) Acts of nature
3.) Interdependence
=> pooled, sequential, and reciprocal interd.

(also: interventions from higher-level management can affect lower-level managers result measures significantly)

Question 3

How can controlling for the distorting effects of uncontrollables be accomplished?

Answer 3

1.) Controlling for uncontrollables before the measurement period begins

= define results measures, so only controllable factors are included

2.) Controlling for uncontrollables after the measurement period:

= calculate or adjust for uncontrollables

Question 4

What are the possibilities to adjust for uncontrollables?

Answer 4

1.) Variance Analysis (segregate uncontrollables)
2.) Flexible Performance Standards
3.) Relative Performance Evaluation
4.) Sujective Performance Evaluations