Results Controls

Question 1

What are results controls and what determines their success?

Answer 1

•Systems built around the definition of relevant dimensions for performance measurement, setting of performance targets and provision of performance-related rewards.
•Traditionally focused on financial performance but increasingly incorporating both financial and non-financial performance dimensions (e.g., the Balanced Scorecard).
•Results controls work best when there is:
- Goal clarity
- Controllability
- Measurability

Question 2

What type of organizational structure do results controls facilitate?

Answer 2

• Decentralized, Entrepreneurial model
• Corporate managers can judge the effectiveness and efficiency of each entity whilst leaving the execution of operations to those responsible for the performance of the decentralized entities. Ideal with professionals in businesses with fast changing environment.
• DuPont strategic business units – responsiveness
• Empowerment in decentralised through results controls can lead to increased complexity, transaction costs, inefficiencies and inconsistencies – Johnson and Johnson
• It can further lead to corruption – French Carrefour in china

Question 3

How do results controls eliminate control problems?

Answer 3

• Lack of direction – well defined results inform employees as to what is expected of them and direct employees focus to certain objectives e.g. sales
• Motivation Problems – the result controls reduce motivational problems if the performance targets are effective and incentive for achieving results furthers employees personal benefits
• Personal limitation - result controls promise rewards for good performers which helps organizations attract and retain employees who are confident in their abilities.

Question 4

What are the four steps in implementing results controls?

Answer 4

1. Defining the relevant dimension(s) which results are desired
2. Measuring performance in the chosen dimensions
3. Setting performance targets for employees to attain for each of the measures
4. Providing rewards for target attainment to encourage behaviours.

Question 5

What are some of the problems with results controls?

Answer 5

• You are what you measure – unprecise metrics can achieve undesired performance
• Jean Tirole showed how they can skew efforts and encourage excessive risk taking we saw in the financial crisis with short term annual Bonuses.
• Public sector – police department human trafficking neglected to solve higher volumes of easy crimes – ill-defined performance targets

Question 6

What determines the effectiveness of performance measurements?

Answer 6

• Precision – non-random measures to minimise “measurement noise” – Bulls Eye
• Objectivity – free from judgemental bias – independent and audited
• Timeliness – minimal time lag for motivation (deferred bank bonuses) and intervention before the issue worsens causing more harm
• Understandability
• Cost efficiency!

Question 7

When is the use of results controls not appropriate?

Answer 7

•In situations where there are many, significant, uncontrollable influences which affect the available result measures, results controls are not effective.