Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed
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- Distinction between managers and organisational units Points to stress
- Teaching tips
| Points to stress Lower-level managers who are responsible for day-to-day operations usually require more frequent feedback than senior executives who primarily exercise oversight over the lower-level managers. Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5 th Edition, Instructor’s Manual © Pearson Education Limited 2012 Distinction between managers and organisational units Points to stress This section explains the implications of agency theory for designing managers compensation contracts. When owners cannot directly monitor managers actions, performance-based compensation can help align managers and owners interests (i.e. it helps induce goal congruence. The disadvantage is that performance-based compensation places more risk on the manager, since outcomes depend to some extent on non-controllable factors. People who decide to become entrepreneurs (owners) are generally more risk tolerant than those who decide to work for others (managers. It is more efficient for owners to bear risk than managers, since the latter demand a premium (extra compensation) forbearing risk. The objective of many executive compensation contracts is to provide the manager with incentives to work hard, while minimising the risk placed on the manager. Incentive compensation plans are most likely to be cost effective if a the owner and manager have different goals (e.g. owner wants profits, manager is work averse. If goals are identical, owners and managers interests are aligned, so incentive compensation is unnecessary b the owner cannot monitor the managers actions. Otherwise, the owner would compensate the manager based on the manager’s actions, in order to reduce the risk shifted to the manager. c the manager has considerable control over the performance measure outcome. (If the manager has little control over the outcome, the incentive plan will place undue risk on the risk-averse manager and he will demand a premium forbearing the risk) When possible, owners use performance evaluation measures that are tightly linked to managers efforts. This is consistent with the notion that managers should be evaluated on the basis of factors they can affect, even if these factors are not completely controllable. For example, salespeople obviously can affect the amount of sales revenue they generate. Salespeople obviously affect the amount of sales they generate by deciding to work harder, but they cannot completely control the level of sales, because other factors such as the economy and competitors products also affect sales. Teaching tips To help students understand why incentive compensation is becoming more popular, even if it places more risk on the manager, ask them to consider experiences they have had with government bureaucrats (e.g. obtaining driver’s licence, obtaining financial assistance at a university. The problems caused by the relative absence of incentive compensation should be immediately obvious. Download 1.72 Mb. Share with your friends:
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