Page 219 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes 3. If senior management by its actions regards the management control system as important,
operating managers will also regard it likewise. If it is otherwise, the operating managers
will follow suit.
4. Individuals are highly motivated when they receive reports or feedback about their
performance. Without such feedback, people are unlikely to obtain a feeling of achievement
or self realization or sense corrective actions that are needed to meet their objectives.
5. An incentive becomes less effective as the period between an action and the feedback
increases. At lower levels in the organization, the optimal frequency of feedback between
the action and the feedback may be only hours; for senior management, it may be months.
6. Motivation is the weakest when the person perceives an incentive as being either
unattainable or too easily attainable. Motivation is strong when the objective can be
obtained with some effort and when the individual regards its attainment as important in
relation to personal needs.
7. The incentives provided by the budget or other statements of objective are the strongest
when managers participate actively alongwith their superiors in the process of arriving at
the budgeted amounts.

11.1 Characteristics of Incentive Compensation Package

A manager’s total compensation package consists of three components:
1. Salary
2. Benefits and perquisites and
3. Incentive compensation
The three components are interdependent but the third is specially related to the management
control function.

!

Caution Many corporate laws and securities regulations require that incentives
compensation plans and revisions of existing plans be approved by the shareholders and
before that it has to be approved by the board of directors.

Incentive compensation plans can be divided into:
1. Short-term incentive plans, which are based on performance in the current year and
2. Long-term incentive plans, which relate compensation to the longer-term
accomplishments. The manager may earn a bonus under both plans. Short-term bonus is
usually paid in cash whereas long-term bonus plan usually consists of an option to buy the
company’s equity shares at some price other than market value.

11.2 Short-term Incentive Plans

First of all, the total amount of bonus that can be paid to a qualified group of employees in a
given year which is called the “bonus pool”, is decided based on overall profitability in the
current year (in some companies, the current quarter) and also make the total compensation
paid to executives competitive. Several methods of establishing bonus pool are as given below:
1. Bonus equal to a set percentage of profits. The drawback of this method is that one has to
pay bonus even at low levels of profitability. It also does not consider additional

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