Direct & Indirect Control Costs

Cost of control ...

Benefit of controls

A higher probability that people will both work hard and direct their
energies to serve the organizations interests.

Costs of controls

Direct out-of-pocket costs

Easy to quantify: cost of cash bonuses, internal audit staffs,

etc.;

Difficult to quantify: time spend on planning and budgeting

activities,
on pre-action reviews, etc.

Harmful side-effects

Behavioral displacement

Gamesmanship

Operating delays

Negative attitudes.

Behavioral displacement ...

Behavioral displacement occurs when the control system produces /
encourages behaviors that are not consistent
with the organizations objectives.
With results controls, it occurs when the results measures are
incongruent with the organizations true objectives; because

Poor understanding of the desired results:

unwillingness to adapt production schedules to
profitable rush orders
sales volumes instead of profits, etc.

Over-quantification: focus solely on quantifiable

measures
Intangibles are often overlooked.

With action controls, it comes in the form of ...

Means-ends inversion

 Employees are induced to pay more attention to what

they do and lose sight of what they try to accomplish.

Rigid, non-adaptive, bureaucratic behavior

Gamesmanship ...
Refers to the actions managers take to improve their performance
indicators without producing any positive economic effects. Two main
alternatives

Creation of slack resources

Consumption of assets in excess of what is required;

Slack can reduce manager tension and stimulate
innovation;

However, it causes inefficient resource allocation;

Depends on information asymmetry, measurement

precision, and
degree of subordinate participation in setting
performance targets.

Data manipulation

Trying to look good by fudging the control indicators;

Falsification, i.e., reporting erroneous data;

Data management, i.e., any action to change the

reported result:

Through accounting methods (e.g., reserves,

write-offs)

Through operating methods (e.g., delaying

expenses).

Operating delays ...

Mostly associated with action controls,
notably, delays caused by:

Pre-action reviews;

Behavioral constraints.

Bureaucratic organizations.

When fast action is important, operational

delays can be quite costly.

Negative attitudes ...

Job tension, conflict, frustration, resistance, etc.

Are often coincident with many harmful behaviors, such

as, gaming, lack of effort, absenteeism, turnover, etc.

Action controls often annoy professionals, but

also lower-level personnel

Sometimes difficult to avoid: e.g., it is difficult for people to

enjoy following a strict set of procedures for a long period of
time ...

Results controls ...

Lack of employee commitment to the performance

targets;
targets are too difficult, not meaningful, not
controllable.

Performance evaluations are perceived as being

unfair;

The controls are implemented in a people-insensitive,

nonsupportive way.

Keep a behavioral focus ...

There is no one best form of control ...

What works best in one company (or area within

a company), may not work in another ...

e.g., accounting personnel vs. design engineers.

Therefore, it is important to keep the focus on

the people involved, because

It is their responses that will determine the success

or failure of the control system !

The benefits of controls are derived only from

their impacts on behaviors !