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Concepts Flashcards

1
Q

Three-legged stool

A

A metaphor for the interrelationship and complementarity between reporting system, organizational design, performance evaluation, and soft controls.

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2
Q

Organizational structure (market, function, or matrix)

A

A system that outlines how certain activities are directed within the organization + inclusion of allocation of decision rights

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3
Q

allocation of decision rights

A

The allocation of the rights who decides what and who is accountable for what.
Driven by economic determinants, intrinsic value, and personality

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4
Q

Intrinsic value of decision rights

A

Principals value decision rights intrinsically, as it gives a sense of freedom and autonomy.
Increases with amount of money at stake
decreases with size of the conflict of interest

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5
Q

Control & Delegation

A

Control - you have to put effort in it, but you choose the alternative you want
Delegation - you save on effort costs, but you cannot choose the alternative

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6
Q

centralization

A

the power of planning and decision making are ‘centralized’ and in the hands of top management

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7
Q

decentralization

A

Middle- and lower level management has power to make decisions.
It is delegation of authority, at all levels of management

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8
Q

Performance measure

A

quantifiable indicator used to assess how well an organization is achieving its desired objectives

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9
Q

From aggregate to specific PM

A

Accounting return - aggregate financial - disaggregate financial - external nonfinancial - internal nonfinancial

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10
Q

Performance measure: Sensitivity

A

the extent to which the expected value of the PM changes with a change of the agent’s effort

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11
Q

Performance measure - precision

A

the extent to which the expected value of the PM is affected by uncontrollable factors

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12
Q

performance measure - verifiability

A

the extent to which it is ex ante clear how the performance measure is calculated

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13
Q

performance measure - congruence

A

the extent to which the performance measure reflects contributions to overall firm value

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14
Q

the relation between delegation and PM

A

A higher relative quality of financial performance, and thus PM, will lead to more delegation

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15
Q

incentive effect of promotions

A

the probability of a promotion will lead to increased effort

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16
Q

matching effect of promotions

A

the firm wants to promote the most capable employee to a higher hierarchical position

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17
Q

intertemporal choice problem

A

managers have a higher preference for short-term objectives, whereas it would be in the firm’s interest to look at long-term objectives

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18
Q

accounting return measures

A

PM related to the assets used and costs of these assets (ROA, ROI)

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19
Q

non financial measures

A

PM which are leading indicators, not expressed in monetary value. i.e., customer service

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20
Q

subjective performance evaluation

A

using non-contractible information to assess the effort of agents, which are not sufficiently captured by objective PM

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21
Q

fundamental equation of PM

A

observed value = true value + noise + bias

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22
Q

Discretionary adjustment

A

the ex ante option to ex post override a formula based contract

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23
Q

subjective weights

A

the earning of a bonus is based on the achievement of various individual performance objectives, with no particular weight being assigned to these objectives

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24
Q

noise (in context subjectivity)

A

a pm can be influenced by uncontrollable factors

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25
Q

congruence (in context subjectivity)

A

a pm does not capture all aspects of what a good employee should do

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26
Q

informativeness principle

A

compensation contracts should include any costless measure that carries incremental information on the agent’s actions

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27
Q

calibration committee

A

team of supervisors and higher-level managers, which execute the subjective performance evaluation

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28
Q

leniency bias

A

tendency of supervisors to rate a subordinate higher than the performance warrants (to reflect sympathy, favoritism, or avoid conflict)

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29
Q

centrality bias

A

tendency for ratings to be compressed around some value resulting in a narrow distribution

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30
Q

inconsistency in ratings

A

different supervisors might factor in different criteria, leading to inconsistent ratings and unfairness perceptions among similar employees

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31
Q

impact calibration committee

A

improve consistency, reduce leniency bias, increase centrality bias

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32
Q

target ratcheting

A

using past performance information to set targets for next period

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33
Q

ratchet effect

A

the strategic response by the agent to restrict output in current period to set favorable future targets

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34
Q

implicit agreements for target setting

A

agreement to deemphasize past performances when revising the target.
principal won’t revise when deviation is caused by superior effort or transitory gain.
agent won’t ratchet when there is structural change in true economic capacity

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35
Q

Delegation of DR (in context CC)

A

CCs are less likely to adjust supervisor ratings of subordinates who are
further removed from committee members within the organizational hierarchy, and more likely to adjust ratings of subordinates who are closer to the committee members

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36
Q

Organizational learning (in context CC)

A

CCs play a role in training supervisors regarding organizational expectations of how observed performance should be rated

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37
Q

crowding-out effect

A

the idea that people lose their intrinsic motivatino to accomplish something because extrinsic motivators are added to motivate

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38
Q

self determination theory

A

initially controlled motivation can be internalized leading to autonomous motivation

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39
Q

internalization

A

Over time, employees develop autonomous motivation for behavior that is initially motivated in a controlled way, and they assimilate the stretch target into their own values

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40
Q

Three basic needs for internalization

A

competence - people need to gain mastery of their tasks and learn different skills
relatedness - people need to experience a sense of belonging and attachment to other people
autonomy - people need to feel in control of their own behaviors and goals

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41
Q

McNamara Fallacy

A

if you can’t measure what is important, what you can measure becomes important

42
Q

Campbell’s Law

A

If you start to measure relatively inaccessible strategic constructs then people will overly focus on the measure and forget the strategy.

the more any quantitative social indicator is used for social decision making, the more subject it will be to corruption pressures, which will lead to distortion and corruption of the process

43
Q

measure management

A

when performance measures capture strategic construct with error, the people being evaluated are aware of this fact, and people have discretion to distort either operations or reporting

44
Q

surrogation

A

The tendency of managers to lose sight of the strategic construct a performance measure is intended to represent, and subsequently act as the measure is the construct of interest.

45
Q

law of measure management (3 factors)

A

measurement - the performance is an imperfect proxy for underlying strategic construct
motivation - people are aware of the PM, with which they are evaluated and care about the evaluation
discretion - people have the ability to distort

solution = improve PM, weaken motivation, address discretion

46
Q

strategic saliency

A

the extent to which an employee acknowledges the strategy
Three ways:
- using multiple PM’s
- involving employees in strategy
- narrative reporting

47
Q

strategic involvement of employees - information effect

A

when employees are involved in strategy selection, they acquire information that helps them to better understand the strategy

48
Q

strategic involvement of employees - motivation effect

A

involvement in the strategy selection gives employees a sense of ownership and increases the identification with the organizational objectives

49
Q

attribute substitution theory

A

when an individual has to make a judgment on a target attribute, that is computationally complex, and instead substitutes a more easily calculated heuristic attribute

50
Q

narrative reporting

A

a supplement to objective performance information, in which employees EXPLAIN AND JUSTIFY the decision they have taken in the past

51
Q

employee selection

A

Selecting employees from which companies may ex-ante expect that they will act in the best interest of the firm.
more aligned with organizational objectives

52
Q

contracting on output

A

highly standardized & easy to verify if employee is doing well

53
Q

contracting on input

A

highly diversified and difficult to verify if employee is doing well
if you search for particular type of employee (behavior)

54
Q

asymmetric information wrt abilities and preferences of employees

A

The problem of employee selection is the information asymmetry regarding the abilities, personality, and preferences of the applicant.
It is easy to say that you like the goals of a firm instead of measuring it.

55
Q

sorting effects of features of performance-based contracts

A

when employees expect that supervisors use their observations about employee identification, they will anticipate this in their contract choice

56
Q

employee identification with the organization’s objectives

A

The willingness of employees to pursue the objectives set by the firm. Employees who identify with the firm’s objectives are more likely to choose higher effort levels under the same performance-based employment contract.

57
Q

leadership

A

the ability to lead a team, using knowledge from team members to make decisions, have employees trust him, and be upward communicative

58
Q

behavioral integrity

A

practice what you preach
word-action consistency

59
Q

psychological safety

A

a shared belief held by the members of a team that the team is safe for interpersonal risk taking
- team members feel safe to speak up
- issues can be openly discussed
- people feel more satisfied in such an environment

60
Q

tacit knowledge

A

knowledge gained from personal experience that is more difficult to express, and can not be learned by reading it etc.

61
Q

task-specific experience

A

if you have done a task, you better understand that the task has some level of challenge

62
Q

extrinsic incentives bias

A

people predict that others are more motivated by extrinsic incentives and less motivated by intrinsic incentives COMPARED TO THEMSELVES

63
Q

employee voice

A

the verbal communication of problems or ideas intended to stimulate organizational improvement to superiors

64
Q

top down reporting

A

CEO communicates decision to BU-manager

65
Q

participative reporting

A

BU manager to CEO - information elicitation
CEO to BU manager - decision communication

66
Q

participative budgeting

A

higher-level managers aim to elicit information from lower-level employees in order to improve managerial decision-making in the context of budgeting.

67
Q

social preferences

A

reporting honest and getting the benefits of appearing honest

68
Q

wealth preferences

A

reporting dishonest and acquiring more resources/more wealth

69
Q

information control precision

A

three ways of IS
- No IS
- Coarse IS
- Precise IS -> less honesty as marginal cost of being honest is too large

70
Q

monitoring trap/spiral

A

dishonesty requires hard controls –> honesty preferences of employees eroded -> more dysfunctional behavior -> new hard controls for the dysfunctional behavior

71
Q

social distance

A

measure of closeness and proximity between individuals and groups/higher management.
When social distance between the interacting parties is reduced, social
preferences have a stronger effect on behavior of the parties.

Only for prosocial employees

72
Q

identification with the firm and groups within the firm

A

human beings belong to different groups and identify more strongly with a particular group depending on the context
BU-employee more identify with BU as it most likely has economic incentive to do so

73
Q

hard controls –> its effects

A

incentive effect, trust effect, information leakage effect

74
Q

incentive effect (of hard controls)

A

the effect of the work habits of an individual when they are offered some type of incentive

75
Q

trust effect (of hard controls)

A

choosing for incentives reveals that the superior has low trust in the subordinate (which is reciprocated by the subordinate)

76
Q

information leakage effect (of hard controls)

A

choosing for incentives reveals that ‘dishonesty is the social norm’ and people typically comply with the social norm

77
Q

descriptive norm

A

how things are done

78
Q

injunctive norm

A

how things should be done

79
Q

two roles of PMs

A

decision-facilitating
decision-influencing

80
Q

decision-facilitating role of PMs

A

use of information to diagnose problems and devise interventions aimed at improving performance

81
Q

decision-influencing role of PMs

A

the use of information to evaluate and reward results

82
Q

bayesian updating

A

Agents use new information provided by feedback to update their beliefs about a certain event, a Bayesian updater will be able to improve performance when feedback is more detailed and more timely.

83
Q

net promoter score

A

index measures the willingness of customers to recommend a company or product to others

84
Q

feedback frequency and feedback detail

A

Detailed information leads to improvements in performance but only when it is provided infrequently.

85
Q

task selection bias

A

people prioritize shorter tasks, because they require less time, effort and are easier.
The reasons why this happens is that it speeds up (1) the generation of
positive emotions and (2) the sense of progress. The consequence of this bias is that it is detrimental to long-term productivity.

86
Q

real-time feedback systems (demand driven)

A

systems that allow employees to get feedback when they want, make task selection bias worse

87
Q

immediate gratification of real-time feedback systems

A

in two ways
1) It allows to speed up the generation of positive emotions → employees are always searching for good news, and choosing easy tasks with feedback on these will generate positive emotions.
2) Doing shorter tasks satisfies the need for progress.

88
Q

recordkeeping

A

keeping track of how many easy vs difficult tasks you have done.
mitigates the negative effect of real-time feedback systems on the task selection bias

89
Q

economic pressures

A

Events which increase the value of the information provided by
the updated system.
This contains supply-side economic pressures, such as vendor-pushed updates,
and demand-side economic pressures, such as increased price competition.

90
Q

coercive pressures

A

imposed by regulators mandating certain practices

91
Q

mimetic pressures

A

willingness to conform information systems to peers

92
Q

effect of economic, coercive, and mimetic pressures

A

Only economically driven updates lead to economic benefits in the form of lower operating expenses. In contrast, AS updates prompted by coercive and mimetic pressures actually impose economic costs in the form of higher operating expenses.

93
Q

strategic pricing

A

a retailer will match a competitor’s price if it’s lower than its current price, an economic pressure to update the AS

94
Q

regulation and social outcomes

A

Coercive pressures are imposed by regulators. These regulations are costly because organizations are forced to implement an AS that they do not strictly need based on their current economic determinants. However, regulation is also implemented to improve social outcomes.

Another benefit of coercive pressure updates is that organizations need to collect data that they do not strictly need, however these data can be a trigger to discover new opportunities, which in turn can benefit financial outcomes of the organization

95
Q

asymmetric adjustment of control

A

When deciding to adjust the control in an organization; principals increase control more strongly when control costs decrease, than they decrease control when control costs increase.
→ principals find it easier to increase control, than decrease control

96
Q

managerial rotation

A

Employees are the best informed about a bias in a performance measure. Managers who rotate more frequently spend less time at one unit, and the money that is at stake when revealing bias is lower in case of rotation compared to when you stay in a business unit.

Because less money is at stake, managers who rotate will engage less in moral disengagement when deciding whether to reveal the bias or not.

Also, managers suggest more improvements when they rotate to another business unit compared to when they do not rotate

97
Q

superior effort

A

a performance target deviation driven by the outperformance of an agent compared to his peers in the past performance distribution

98
Q

transitory gain

A

a performance target deviation driven by high environmental volatility in which the agent operates

99
Q

change in true underlying capacity

A

a performance target deviation driven by structural changes in the operation’s true economic capacity

100
Q

correlated omitted variable problem

A

when a variable that is correlated with both the dependent and one or more included independent variables is omitted from the regression equation. An omitted variable leads to biased and inconsistent coefficient estimate(s).

101
Q

three control problems regarding principals of employees

A
  • Lack of direction – employees do not know what the strategy is and what the control objectives are. –> employees do not know what is expected from them
  • Lack of ability – employees do not have the right ability to implement the strategy and reach the control objectives –> employees do not have the right ability to do what is expected from them
  • Lack of effort – employees do not deliver the same level of effort that the entrepreneur delivers –> employees do not work hard enough (both quantity and intensity)
102
Q

extrinsic incentive bias

A

they overestimate the extent to which employees care about extrinsic task features, such as monetary rewards and job security, and underestimate how much employees are motivated by intrinsic features of their task

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