Concepts Flashcards
Three-legged stool
A metaphor for the interrelationship and complementarity between reporting system, organizational design, performance evaluation, and soft controls.
Organizational structure (market, function, or matrix)
A system that outlines how certain activities are directed within the organization + inclusion of allocation of decision rights
allocation of decision rights
The allocation of the rights who decides what and who is accountable for what.
Driven by economic determinants, intrinsic value, and personality
Intrinsic value of decision rights
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
Control & Delegation
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
centralization
the power of planning and decision making are ‘centralized’ and in the hands of top management
decentralization
Middle- and lower level management has power to make decisions.
It is delegation of authority, at all levels of management
Performance measure
quantifiable indicator used to assess how well an organization is achieving its desired objectives
From aggregate to specific PM
Accounting return - aggregate financial - disaggregate financial - external nonfinancial - internal nonfinancial
Performance measure: Sensitivity
the extent to which the expected value of the PM changes with a change of the agent’s effort
Performance measure - precision
the extent to which the expected value of the PM is affected by uncontrollable factors
performance measure - verifiability
the extent to which it is ex ante clear how the performance measure is calculated
performance measure - congruence
the extent to which the performance measure reflects contributions to overall firm value
the relation between delegation and PM
A higher relative quality of financial performance, and thus PM, will lead to more delegation
incentive effect of promotions
the probability of a promotion will lead to increased effort
matching effect of promotions
the firm wants to promote the most capable employee to a higher hierarchical position
intertemporal choice problem
managers have a higher preference for short-term objectives, whereas it would be in the firm’s interest to look at long-term objectives
accounting return measures
PM related to the assets used and costs of these assets (ROA, ROI)
non financial measures
PM which are leading indicators, not expressed in monetary value. i.e., customer service
subjective performance evaluation
using non-contractible information to assess the effort of agents, which are not sufficiently captured by objective PM
fundamental equation of PM
observed value = true value + noise + bias
Discretionary adjustment
the ex ante option to ex post override a formula based contract
subjective weights
the earning of a bonus is based on the achievement of various individual performance objectives, with no particular weight being assigned to these objectives
noise (in context subjectivity)
a pm can be influenced by uncontrollable factors
congruence (in context subjectivity)
a pm does not capture all aspects of what a good employee should do
informativeness principle
compensation contracts should include any costless measure that carries incremental information on the agent’s actions
calibration committee
team of supervisors and higher-level managers, which execute the subjective performance evaluation
leniency bias
tendency of supervisors to rate a subordinate higher than the performance warrants (to reflect sympathy, favoritism, or avoid conflict)
centrality bias
tendency for ratings to be compressed around some value resulting in a narrow distribution
inconsistency in ratings
different supervisors might factor in different criteria, leading to inconsistent ratings and unfairness perceptions among similar employees
impact calibration committee
improve consistency, reduce leniency bias, increase centrality bias
target ratcheting
using past performance information to set targets for next period
ratchet effect
the strategic response by the agent to restrict output in current period to set favorable future targets
implicit agreements for target setting
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
Delegation of DR (in context CC)
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
Organizational learning (in context CC)
CCs play a role in training supervisors regarding organizational expectations of how observed performance should be rated
crowding-out effect
the idea that people lose their intrinsic motivatino to accomplish something because extrinsic motivators are added to motivate
self determination theory
initially controlled motivation can be internalized leading to autonomous motivation
internalization
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
Three basic needs for internalization
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
McNamara Fallacy
if you can’t measure what is important, what you can measure becomes important
Campbell’s Law
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
measure management
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
surrogation
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.
law of measure management (3 factors)
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
strategic saliency
the extent to which an employee acknowledges the strategy
Three ways:
- using multiple PM’s
- involving employees in strategy
- narrative reporting
strategic involvement of employees - information effect
when employees are involved in strategy selection, they acquire information that helps them to better understand the strategy
strategic involvement of employees - motivation effect
involvement in the strategy selection gives employees a sense of ownership and increases the identification with the organizational objectives
attribute substitution theory
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
narrative reporting
a supplement to objective performance information, in which employees EXPLAIN AND JUSTIFY the decision they have taken in the past
employee selection
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
contracting on output
highly standardized & easy to verify if employee is doing well
contracting on input
highly diversified and difficult to verify if employee is doing well
if you search for particular type of employee (behavior)
asymmetric information wrt abilities and preferences of employees
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.
sorting effects of features of performance-based contracts
when employees expect that supervisors use their observations about employee identification, they will anticipate this in their contract choice
employee identification with the organization’s objectives
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.
leadership
the ability to lead a team, using knowledge from team members to make decisions, have employees trust him, and be upward communicative
behavioral integrity
practice what you preach
word-action consistency
psychological safety
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
tacit knowledge
knowledge gained from personal experience that is more difficult to express, and can not be learned by reading it etc.
task-specific experience
if you have done a task, you better understand that the task has some level of challenge
extrinsic incentives bias
people predict that others are more motivated by extrinsic incentives and less motivated by intrinsic incentives COMPARED TO THEMSELVES
employee voice
the verbal communication of problems or ideas intended to stimulate organizational improvement to superiors
top down reporting
CEO communicates decision to BU-manager
participative reporting
BU manager to CEO - information elicitation
CEO to BU manager - decision communication
participative budgeting
higher-level managers aim to elicit information from lower-level employees in order to improve managerial decision-making in the context of budgeting.
social preferences
reporting honest and getting the benefits of appearing honest
wealth preferences
reporting dishonest and acquiring more resources/more wealth
information control precision
three ways of IS
- No IS
- Coarse IS
- Precise IS -> less honesty as marginal cost of being honest is too large
monitoring trap/spiral
dishonesty requires hard controls –> honesty preferences of employees eroded -> more dysfunctional behavior -> new hard controls for the dysfunctional behavior
social distance
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
identification with the firm and groups within the firm
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
hard controls –> its effects
incentive effect, trust effect, information leakage effect
incentive effect (of hard controls)
the effect of the work habits of an individual when they are offered some type of incentive
trust effect (of hard controls)
choosing for incentives reveals that the superior has low trust in the subordinate (which is reciprocated by the subordinate)
information leakage effect (of hard controls)
choosing for incentives reveals that ‘dishonesty is the social norm’ and people typically comply with the social norm
descriptive norm
how things are done
injunctive norm
how things should be done
two roles of PMs
decision-facilitating
decision-influencing
decision-facilitating role of PMs
use of information to diagnose problems and devise interventions aimed at improving performance
decision-influencing role of PMs
the use of information to evaluate and reward results
bayesian updating
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.
net promoter score
index measures the willingness of customers to recommend a company or product to others
feedback frequency and feedback detail
Detailed information leads to improvements in performance but only when it is provided infrequently.
task selection bias
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.
real-time feedback systems (demand driven)
systems that allow employees to get feedback when they want, make task selection bias worse
immediate gratification of real-time feedback systems
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.
recordkeeping
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
economic pressures
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.
coercive pressures
imposed by regulators mandating certain practices
mimetic pressures
willingness to conform information systems to peers
effect of economic, coercive, and mimetic pressures
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.
strategic pricing
a retailer will match a competitor’s price if it’s lower than its current price, an economic pressure to update the AS
regulation and social outcomes
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
asymmetric adjustment of control
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
managerial rotation
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
superior effort
a performance target deviation driven by the outperformance of an agent compared to his peers in the past performance distribution
transitory gain
a performance target deviation driven by high environmental volatility in which the agent operates
change in true underlying capacity
a performance target deviation driven by structural changes in the operation’s true economic capacity
correlated omitted variable problem
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).
three control problems regarding principals of employees
- 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)
extrinsic incentive bias
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
