Management Control Systems (5th Edition) –
Chapter-by-Chapter Summary
Merchant – van der Stede
Chapter 1: Management and Control ..................................................................................................... 2
Chapter 2: Result Controls ...................................................................................................................... 3
Chapter 3: Action, Personnel, and Cultural Controls .............................................................................. 5
Chapter 4: Control System Tightness ...................................................................................................... 9
Chapter 5: Control System Costs ........................................................................................................... 12
Chapter 6: Designing and Evaluating Management Control Systems ................................................... 15
Chapter 7: Financial Responsibility Centers .......................................................................................... 19
Chapter 8: Planning and Budgeting ....................................................................................................... 23
Chapter 9: Incentive Systems ................................................................................................................ 27
Chapter 10: Financial Performance Measures and Their Effects .......................................................... 31
Chapter 11: Remedies to the Myopia Problem ..................................................................................... 34
Chapter 12: Using Financial Results Controls in the Presence of Uncontrollable Factors .................... 37
Chapter 13: Management Control Implications of Stakeholder Welfare Maximization ...................... 40
Chapter 14: Management Control in Not-for-Profit Organizations ...................................................... 43
,Chapter 1: Management and Control
Main Objectives and Key Takeaways: Chapter 1 introduces management control as a core function
of management: ensuring that employees’ behaviours align with organizational objectives. A key
challenge is overcoming the tendency of individuals to pursue their own interests over the
organization’s goals. The chapter explains that effective Management Control Systems (MCSs) are
needed to align interests and prevent “poor management control,” which can lead to large financial
losses or even organizational failure. It highlights real-world headlines of control failures (e.g.
compliance lapses, misleading customers) to show that often it’s not a bad strategy at fault but poor
implementation or enforcement – meaning someone “not doing what they are supposed to do”. In
short, good management control increases the probability that organizational objectives will be
achieved and avoids major unpleasant surprises.
Core Frameworks and Models: The chapter outlines foundational concepts. It identifies three basic
causes of management control problems: (1) Lack of direction – employees are unsure what the
organization expects from them; (2) Motivational problems – employees may know what to do but
choose not to do it (their goals diverge from the organization’s); and (3) Personal limitations –
employees lack the ability or information to perform well (even if they are well-intentioned). These
problems can occur in combination, and if even one is present, effective controls are needed. The
chapter defines “good control” as a situation where management can be reasonably confident that
no major adverse surprises will occur and that the organization will achieve its objectives. Because
perfect control is usually impossible or too costly, managers aim for adequate control, balancing the
cost of controls with the reduction in risk of bad outcomes. The concept of control loss is introduced
as the gap between perfect performance (if there were no control failures) and the expected
performance with the MCS in place. Managers should add controls only if the expected benefit
(reduced control loss) exceeds the cost. This economic cost–benefit perspective underpins the design
of MCSs. The chapter also notes that assessing whether control is “good enough” is inherently
forward-looking and subjective, since it’s about preventing future surprises in pursuit of objectives.
Types of Management Control Mechanisms: If control problems cannot be completely avoided (see
below), managers must employ one or more types of controls. The chapter introduces the
management control alternatives explored in the book: result controls, action controls, and
personnel/cultural controls. These are broad categories of control mechanisms that will be detailed
in subsequent chapters. In practice, most organizations use some combination of all three. For
example, one company might rely heavily on personnel/cultural controls by hiring trustworthy,
skilled people and instilling strong values, whereas another uses strong result controls with
performance-based incentives, and yet another enforces detailed action controls via strict policies
and procedures. The mix depends on many factors, such as what problems are most pressing, the
organization’s culture and management style, and cost-effectiveness considerations. A major
purpose of the book is to analyse how these control choices affect behaviour and performance.
Control Problem Avoidance: Interestingly, the chapter notes that implementing controls isn’t the
only way to manage risk – sometimes companies can avoid control problems altogether. Four
avoidance strategies are highlighted: (1) Activity elimination – avoid risky activities by outsourcing or
not doing them. For example, a firm might divest a business unit it finds hard to control. (2)
Automation – use machines or IT systems to reduce human error or opportunistic behaviour. (3)
Centralization – keep critical decisions at higher levels (or with owners) to avoid control issues at
lower levels. (Even in relatively decentralized firms, some pivotal decisions – major contracts,
hiring/firing key personnel – may be centralized to maintain control.) (4) Risk sharing – share risks
,with third parties, for instance by buying insurance or entering joint ventures. These strategies limit
exposure to control problems by eliminating the opportunity for certain failures. Of course,
avoidance is rarely perfect – companies cannot avoid all risks if they want to operate and grow (they
are rewarded for bearing some risk). But judiciously using elimination, automation, centralization,
and risk sharing can reduce the burden on the MCS.
Ethical Concerns and Corporate Governance: In this introductory chapter, ethical issues are touched
on in the context of control failures. Many headline scandals stem from control breakdowns, such as
compliance failures or employees engaging in fraud (e.g. money laundering not prevented due to
inadequate controls). Good management control helps ensure ethical behaviour by aligning
employees with the organization’s policies and external regulations. Although detailed governance
structures are covered later (Chapter 15), Chapter 1 foreshadows that effective controls are part of
corporate governance and risk management. In essence, if managers do not institute proper
controls, employees might behave unethically or irresponsibly, harming the firm’s reputation and
stakeholders. Thus, a key takeaway is that establishing a robust control environment is not just about
performance – it also underpins ethical conduct and legal compliance.
Chapter 2: Result Controls
Main Objectives and Key Takeaways: Chapter 2 delves into result controls, a prevalent form of
management control in decentralized organizations. Result controls focus on measuring and
incentivizing outcomes (results) rather than directly monitoring actions. The main idea is to give
employees flexibility in how they do their jobs, but hold them accountable for achieving specified
results. This allows for high autonomy while still aligning efforts with organizational objectives. A key
takeaway is that result controls are an indirect form of control: they do not prescribe specific
behaviours, but if designed well, they motivate employees to figure out and do whatever leads to the
desired outcomes. Result controls are especially useful when it’s not feasible or desirable to dictate
every action – for instance, with empowered managers or professionals, or in fast-changing
environments where frontline initiative is valuable. However, result controls work best only under
certain conditions (discussed below). This chapter emphasizes how to implement result controls
effectively and what pitfalls to avoid.
Core Frameworks and Models: The chapter outlines the elements of a results control system,
essentially a four-step model for implementation:
1. Define desired results – Identify the key performance dimensions or objectives that the
organization wants to achieve. This involves determining which results matter (e.g. profit,
growth, quality, customer satisfaction). Clear definition is critical because “what you measure
is what you get” – employees will focus on the defined results.
2. Measure performance on those dimensions – Develop metrics and tracking systems to
quantify the results. Measurement can be financial (e.g. earnings, ROI) or non-financial (e.g.
defect rate, on-time delivery), but must be reliable and aligned with the true objectives.
3. Set targets for the desired results – Establish specific performance goals or benchmarks that
employees are expected to meet or exceed. Targets signal the level of performance
considered satisfactory or excellent.
4. Provide rewards (or punishments) linked to results – Tie the achievement of targets to
meaningful rewards (such as bonuses, promotions, recognition) to encourage employees to
, reach those results. Conversely, failing to meet minimum result standards might lead to
consequences. This creates accountability for outcomes.
While straightforward in concept, executing these steps is challenging. For example, defining the
“right” results can be difficult if an organization has multiple objectives (e.g. balancing profitability
with sustainability – a topic returned to in Chapter 13). Similarly, choosing the right measures is
crucial; they should be congruent with the true objectives (measuring what truly matters). If, for
instance, a company defines shareholder value as the aim but only measures accounting profit,
managers might ignore long-term value drivers. Thus, congruence and completeness of performance
measures are vital to avoid distorted behaviour.
Conditions for Effectiveness: Result controls are powerful but not universally applicable. The
chapter identifies three conditions required for result controls to be effective:
• Knowledge of desired results: The organization must be able to specify what results are
desired in each area. In other words, clear, agreed-upon objectives must exist and be
communicated. If managers aren’t sure what they want from employees (or if objectives
keep shifting), result controls will misfire. Even when broad objectives are clear (e.g.
“improve customer satisfaction”), breaking them down into specific targets for individuals
can be challenging. Mis-specifying result areas can lead to people achieving targets that don’t
actually advance the organization’s true goals (a lack of congruence).
• Controllability of results: The employees whose performance is being measured must have
significant influence over those results. If outcomes are mostly outside an employee’s control
(due to external factors or dependency on others), holding them accountable is unfair and
ineffective. The classic example is making a division manager responsible for profit when
market conditions (an uncontrollable) dominate the results – this can demotivate or lead to
excessive risk aversion. Thus, result controls suit positions where individuals or teams can
substantially affect the results through their actions.
• Ability to measure results effectively: There must be reliable metrics for the desired results.
If you can’t measure it, you can’t reward it. Effective measurement means the metric is
precise, objective, timely, and cost-effective to obtain. Some results (like sales revenue, units
produced, etc.) are easier to measure than others (like innovation or customer goodwill).
When measurement is poor – imprecise or manipulable – result controls either lose
effectiveness or encourage gaming.
If all these conditions are met, result controls can be very tight and effective. If they are not, result
controls may lead to unintended consequences or loose control. A significant portion of the book
(Sections III and IV) deals with situations where result measures (especially financial metrics) have
shortcomings and how to address them.
Impacts on Behaviour and Control Problems: When well-designed, result controls address the basic
control problems in several ways. Lack of direction is alleviated by specifying and communicating the
desired results – employees know what is expected of them. Motivational problems are addressed
by the coupling of results with rewards: employees have a clear incentive to work toward the
organization’s goals because their personal benefits (e.g. bonuses, promotions) depend on it. In
effect, result controls align employee self-interest with organizational interest by rewarding the
achievement of organizational goals. This can motivate even without direct supervision, since
employees, left to their own methods, will strive to maximize the measured results that lead to
rewards. Result controls can also mitigate personal limitations: promising rewards for good results
,tends to attract and retain more confident, capable people who believe they can deliver (those who
lack ability might self-select out). It also encourages employees to develop their skills to improve
performance and reap the rewards.
Another benefit is that result measures provide feedback and information to management. They
function as a diagnostic control: if a unit’s results are off target, it flags a problem, prompting
managers to investigate and take corrective action (a management by exception approach). For
example, if a branch’s profit falls short, upper management can intervene – perhaps the strategy or
the manager needs changing. In this way, result controls also serve a monitoring role by highlighting
where things are going well or poorly.
However, the chapter also cautions that not all results measures are perfect; trade-offs often exist
among measure properties (e.g. a very timely measure might be less precise, or a precise measure
may not be fully congruent). Managers must use judgment to select a good set of measures and
sometimes accept some imperfections. Poorly chosen result metrics can cause behavioural
displacement (employees focus on the measured results at the expense of true objectives) – a topic
expanded in Chapter 5.
Financial Control Systems and Performance Measurement Issues: Result controls often manifest as
financial performance measures (like profit, ROI, etc.), especially in for-profit firms. Chapter 2 notes
that these are very common in decentralized organizations because they allow top management to
control via financial responsibility centers (a topic of Chapter 7) – e.g. holding a division manager
accountable for division profits. Financial result controls have well-known advantages (objectivity,
aggregation, etc.) but also known problems (short-term focus, potential for manipulation) that are
not deeply discussed here but foreshadowed. For instance, the chapter hints that when results
measures are incomplete or uncontrollable, they may drive dysfunctional behavior. It sets the stage
for later sections by implying that managers need to be aware of potential myopia or distortion
caused by financial metrics.
Ethical Concerns and Governance: Result controls, if improperly designed, can create ethical
dilemmas. An overly aggressive results-based scheme might tempt employees to cut corners or
misreport data to hit targets. Chapter 2 implicitly warns that measures must be congruent with true
objectives – which include operating within legal and ethical boundaries. A classic ethical issue is
“hitting the numbers” at all costs – if employees feel immense pressure to meet financial targets,
they might engage in fraud or mis-selling. Thus, while not explicitly discussed in this chapter, the
design of result controls should consider ethical safeguards (e.g. include compliance and quality
metrics, not just sales or profit). In terms of governance, result controls decentralize decision-making
(empowering managers) but require a governance framework to set appropriate targets and monitor
outcomes. The link between result control and corporate governance appears later (Chapter 15),
when discussing how boards set performance goals for top executives and oversee incentive plans. In
summary, result controls must be implemented with a sense of organizational justice and integrity –
rewarding good performance but not encouraging unethical means to achieve results.
Chapter 3: Action, Personnel, and Cultural Controls
Main Objectives and Key Takeaways: Chapter 3 examines the other major categories of
management controls: action controls and personnel/cultural controls. These controls aim to ensure
that employees behave in the organization’s best interest by directly influencing what people do,
, rather than just the results they produce. The key takeaway is that while result controls are indirect,
action controls are the most direct form of control, and personnel/cultural controls work by
shaping the workforce’s capabilities and values. Organizations often supplement or replace result
controls with these approaches, especially when they either know the specific actions that are
desirable or when they want to create an environment where employees naturally do the right thing.
This chapter teaches that effective control systems frequently rely on a blend of all these types, and
it explores how action, personnel, and cultural controls function, their effectiveness conditions, and
their impact on behaviour.
Action Controls: Action controls involve ensuring employees perform (or avoid) certain actions
known to be beneficial (or harmful) to the organization. In other words, management specifies or
restricts the behaviours themselves. Action controls are only feasible when managers have
knowledge of which specific actions will lead to good outcomes (or which should be prevented) and
can enforce those actions or restrictions effectively. When applicable, action controls provide a very
direct way to achieve control. The chapter identifies four basic forms of action controls:
• Behavioural constraints: These are mechanisms that prevent undesired actions. They can be
physical constraints (locks, passwords, system access controls, automatic blocks) or
administrative constraints (policies like separation of duties, requiring approvals for certain
transactions). For example, a company might physically lock inventory or require dual
signatures on checks to stop theft or errors. Such constraints make it impossible or more
difficult for employees to do what they should not do. This form of action control is largely
preventive and “negative” – it’s about blocking bad behaviour.
• Preaction reviews: These involve approvals or reviews of plans/decisions before action is
taken. Management examines proposed actions (e.g. budgets, investment proposals) and
must sign off before the employee can proceed. This ensures that actions are vetted to be in
line with organizational goals. For instance, a manager might need to get approval for
expenditures over a certain amount or for any deviation from standard procedures.
Preaction reviews are a way for higher-level managers to exercise control by screening
actions in advance using their experience and oversight.
• Action accountability: This form sets rules or procedures for desirable actions and then tracks
whether employees follow them, holding them accountable. It requires defining what actions
(or standards of behaviour) are expected (or forbidden), communicating those to employees,
and then monitoring compliance. For example, salespeople might be required to make a
certain number of client calls per week and report on them, or a factory worker might have a
checklist to follow. If employees deviate from prescribed actions, they may face sanctions; if
they comply or exceed standards, they may be rewarded. Action accountability often
involves documentation and audits to verify that procedures were followed.
• Redundancy: This involves assigning more resources or people to a task than strictly
necessary, as a form of check. Common examples are requiring two people to perform or
review a critical task (dual control) or having back-up personnel to catch errors (e.g. a second
person rechecking calculations). Redundancy increases the likelihood that mistakes or
improprieties are caught or prevented by overlapping efforts. It’s essentially a control
through duplication – for instance, having two pilots in a cockpit or multiple sign-offs on a
project ensures that one person’s lapse can be caught by another.
By employing these forms, action controls directly affect behaviour: employees comply with
constraints and procedures, thereby theoretically doing what is best for the organization. A clear
Chapter-by-Chapter Summary
Merchant – van der Stede
Chapter 1: Management and Control ..................................................................................................... 2
Chapter 2: Result Controls ...................................................................................................................... 3
Chapter 3: Action, Personnel, and Cultural Controls .............................................................................. 5
Chapter 4: Control System Tightness ...................................................................................................... 9
Chapter 5: Control System Costs ........................................................................................................... 12
Chapter 6: Designing and Evaluating Management Control Systems ................................................... 15
Chapter 7: Financial Responsibility Centers .......................................................................................... 19
Chapter 8: Planning and Budgeting ....................................................................................................... 23
Chapter 9: Incentive Systems ................................................................................................................ 27
Chapter 10: Financial Performance Measures and Their Effects .......................................................... 31
Chapter 11: Remedies to the Myopia Problem ..................................................................................... 34
Chapter 12: Using Financial Results Controls in the Presence of Uncontrollable Factors .................... 37
Chapter 13: Management Control Implications of Stakeholder Welfare Maximization ...................... 40
Chapter 14: Management Control in Not-for-Profit Organizations ...................................................... 43
,Chapter 1: Management and Control
Main Objectives and Key Takeaways: Chapter 1 introduces management control as a core function
of management: ensuring that employees’ behaviours align with organizational objectives. A key
challenge is overcoming the tendency of individuals to pursue their own interests over the
organization’s goals. The chapter explains that effective Management Control Systems (MCSs) are
needed to align interests and prevent “poor management control,” which can lead to large financial
losses or even organizational failure. It highlights real-world headlines of control failures (e.g.
compliance lapses, misleading customers) to show that often it’s not a bad strategy at fault but poor
implementation or enforcement – meaning someone “not doing what they are supposed to do”. In
short, good management control increases the probability that organizational objectives will be
achieved and avoids major unpleasant surprises.
Core Frameworks and Models: The chapter outlines foundational concepts. It identifies three basic
causes of management control problems: (1) Lack of direction – employees are unsure what the
organization expects from them; (2) Motivational problems – employees may know what to do but
choose not to do it (their goals diverge from the organization’s); and (3) Personal limitations –
employees lack the ability or information to perform well (even if they are well-intentioned). These
problems can occur in combination, and if even one is present, effective controls are needed. The
chapter defines “good control” as a situation where management can be reasonably confident that
no major adverse surprises will occur and that the organization will achieve its objectives. Because
perfect control is usually impossible or too costly, managers aim for adequate control, balancing the
cost of controls with the reduction in risk of bad outcomes. The concept of control loss is introduced
as the gap between perfect performance (if there were no control failures) and the expected
performance with the MCS in place. Managers should add controls only if the expected benefit
(reduced control loss) exceeds the cost. This economic cost–benefit perspective underpins the design
of MCSs. The chapter also notes that assessing whether control is “good enough” is inherently
forward-looking and subjective, since it’s about preventing future surprises in pursuit of objectives.
Types of Management Control Mechanisms: If control problems cannot be completely avoided (see
below), managers must employ one or more types of controls. The chapter introduces the
management control alternatives explored in the book: result controls, action controls, and
personnel/cultural controls. These are broad categories of control mechanisms that will be detailed
in subsequent chapters. In practice, most organizations use some combination of all three. For
example, one company might rely heavily on personnel/cultural controls by hiring trustworthy,
skilled people and instilling strong values, whereas another uses strong result controls with
performance-based incentives, and yet another enforces detailed action controls via strict policies
and procedures. The mix depends on many factors, such as what problems are most pressing, the
organization’s culture and management style, and cost-effectiveness considerations. A major
purpose of the book is to analyse how these control choices affect behaviour and performance.
Control Problem Avoidance: Interestingly, the chapter notes that implementing controls isn’t the
only way to manage risk – sometimes companies can avoid control problems altogether. Four
avoidance strategies are highlighted: (1) Activity elimination – avoid risky activities by outsourcing or
not doing them. For example, a firm might divest a business unit it finds hard to control. (2)
Automation – use machines or IT systems to reduce human error or opportunistic behaviour. (3)
Centralization – keep critical decisions at higher levels (or with owners) to avoid control issues at
lower levels. (Even in relatively decentralized firms, some pivotal decisions – major contracts,
hiring/firing key personnel – may be centralized to maintain control.) (4) Risk sharing – share risks
,with third parties, for instance by buying insurance or entering joint ventures. These strategies limit
exposure to control problems by eliminating the opportunity for certain failures. Of course,
avoidance is rarely perfect – companies cannot avoid all risks if they want to operate and grow (they
are rewarded for bearing some risk). But judiciously using elimination, automation, centralization,
and risk sharing can reduce the burden on the MCS.
Ethical Concerns and Corporate Governance: In this introductory chapter, ethical issues are touched
on in the context of control failures. Many headline scandals stem from control breakdowns, such as
compliance failures or employees engaging in fraud (e.g. money laundering not prevented due to
inadequate controls). Good management control helps ensure ethical behaviour by aligning
employees with the organization’s policies and external regulations. Although detailed governance
structures are covered later (Chapter 15), Chapter 1 foreshadows that effective controls are part of
corporate governance and risk management. In essence, if managers do not institute proper
controls, employees might behave unethically or irresponsibly, harming the firm’s reputation and
stakeholders. Thus, a key takeaway is that establishing a robust control environment is not just about
performance – it also underpins ethical conduct and legal compliance.
Chapter 2: Result Controls
Main Objectives and Key Takeaways: Chapter 2 delves into result controls, a prevalent form of
management control in decentralized organizations. Result controls focus on measuring and
incentivizing outcomes (results) rather than directly monitoring actions. The main idea is to give
employees flexibility in how they do their jobs, but hold them accountable for achieving specified
results. This allows for high autonomy while still aligning efforts with organizational objectives. A key
takeaway is that result controls are an indirect form of control: they do not prescribe specific
behaviours, but if designed well, they motivate employees to figure out and do whatever leads to the
desired outcomes. Result controls are especially useful when it’s not feasible or desirable to dictate
every action – for instance, with empowered managers or professionals, or in fast-changing
environments where frontline initiative is valuable. However, result controls work best only under
certain conditions (discussed below). This chapter emphasizes how to implement result controls
effectively and what pitfalls to avoid.
Core Frameworks and Models: The chapter outlines the elements of a results control system,
essentially a four-step model for implementation:
1. Define desired results – Identify the key performance dimensions or objectives that the
organization wants to achieve. This involves determining which results matter (e.g. profit,
growth, quality, customer satisfaction). Clear definition is critical because “what you measure
is what you get” – employees will focus on the defined results.
2. Measure performance on those dimensions – Develop metrics and tracking systems to
quantify the results. Measurement can be financial (e.g. earnings, ROI) or non-financial (e.g.
defect rate, on-time delivery), but must be reliable and aligned with the true objectives.
3. Set targets for the desired results – Establish specific performance goals or benchmarks that
employees are expected to meet or exceed. Targets signal the level of performance
considered satisfactory or excellent.
4. Provide rewards (or punishments) linked to results – Tie the achievement of targets to
meaningful rewards (such as bonuses, promotions, recognition) to encourage employees to
, reach those results. Conversely, failing to meet minimum result standards might lead to
consequences. This creates accountability for outcomes.
While straightforward in concept, executing these steps is challenging. For example, defining the
“right” results can be difficult if an organization has multiple objectives (e.g. balancing profitability
with sustainability – a topic returned to in Chapter 13). Similarly, choosing the right measures is
crucial; they should be congruent with the true objectives (measuring what truly matters). If, for
instance, a company defines shareholder value as the aim but only measures accounting profit,
managers might ignore long-term value drivers. Thus, congruence and completeness of performance
measures are vital to avoid distorted behaviour.
Conditions for Effectiveness: Result controls are powerful but not universally applicable. The
chapter identifies three conditions required for result controls to be effective:
• Knowledge of desired results: The organization must be able to specify what results are
desired in each area. In other words, clear, agreed-upon objectives must exist and be
communicated. If managers aren’t sure what they want from employees (or if objectives
keep shifting), result controls will misfire. Even when broad objectives are clear (e.g.
“improve customer satisfaction”), breaking them down into specific targets for individuals
can be challenging. Mis-specifying result areas can lead to people achieving targets that don’t
actually advance the organization’s true goals (a lack of congruence).
• Controllability of results: The employees whose performance is being measured must have
significant influence over those results. If outcomes are mostly outside an employee’s control
(due to external factors or dependency on others), holding them accountable is unfair and
ineffective. The classic example is making a division manager responsible for profit when
market conditions (an uncontrollable) dominate the results – this can demotivate or lead to
excessive risk aversion. Thus, result controls suit positions where individuals or teams can
substantially affect the results through their actions.
• Ability to measure results effectively: There must be reliable metrics for the desired results.
If you can’t measure it, you can’t reward it. Effective measurement means the metric is
precise, objective, timely, and cost-effective to obtain. Some results (like sales revenue, units
produced, etc.) are easier to measure than others (like innovation or customer goodwill).
When measurement is poor – imprecise or manipulable – result controls either lose
effectiveness or encourage gaming.
If all these conditions are met, result controls can be very tight and effective. If they are not, result
controls may lead to unintended consequences or loose control. A significant portion of the book
(Sections III and IV) deals with situations where result measures (especially financial metrics) have
shortcomings and how to address them.
Impacts on Behaviour and Control Problems: When well-designed, result controls address the basic
control problems in several ways. Lack of direction is alleviated by specifying and communicating the
desired results – employees know what is expected of them. Motivational problems are addressed
by the coupling of results with rewards: employees have a clear incentive to work toward the
organization’s goals because their personal benefits (e.g. bonuses, promotions) depend on it. In
effect, result controls align employee self-interest with organizational interest by rewarding the
achievement of organizational goals. This can motivate even without direct supervision, since
employees, left to their own methods, will strive to maximize the measured results that lead to
rewards. Result controls can also mitigate personal limitations: promising rewards for good results
,tends to attract and retain more confident, capable people who believe they can deliver (those who
lack ability might self-select out). It also encourages employees to develop their skills to improve
performance and reap the rewards.
Another benefit is that result measures provide feedback and information to management. They
function as a diagnostic control: if a unit’s results are off target, it flags a problem, prompting
managers to investigate and take corrective action (a management by exception approach). For
example, if a branch’s profit falls short, upper management can intervene – perhaps the strategy or
the manager needs changing. In this way, result controls also serve a monitoring role by highlighting
where things are going well or poorly.
However, the chapter also cautions that not all results measures are perfect; trade-offs often exist
among measure properties (e.g. a very timely measure might be less precise, or a precise measure
may not be fully congruent). Managers must use judgment to select a good set of measures and
sometimes accept some imperfections. Poorly chosen result metrics can cause behavioural
displacement (employees focus on the measured results at the expense of true objectives) – a topic
expanded in Chapter 5.
Financial Control Systems and Performance Measurement Issues: Result controls often manifest as
financial performance measures (like profit, ROI, etc.), especially in for-profit firms. Chapter 2 notes
that these are very common in decentralized organizations because they allow top management to
control via financial responsibility centers (a topic of Chapter 7) – e.g. holding a division manager
accountable for division profits. Financial result controls have well-known advantages (objectivity,
aggregation, etc.) but also known problems (short-term focus, potential for manipulation) that are
not deeply discussed here but foreshadowed. For instance, the chapter hints that when results
measures are incomplete or uncontrollable, they may drive dysfunctional behavior. It sets the stage
for later sections by implying that managers need to be aware of potential myopia or distortion
caused by financial metrics.
Ethical Concerns and Governance: Result controls, if improperly designed, can create ethical
dilemmas. An overly aggressive results-based scheme might tempt employees to cut corners or
misreport data to hit targets. Chapter 2 implicitly warns that measures must be congruent with true
objectives – which include operating within legal and ethical boundaries. A classic ethical issue is
“hitting the numbers” at all costs – if employees feel immense pressure to meet financial targets,
they might engage in fraud or mis-selling. Thus, while not explicitly discussed in this chapter, the
design of result controls should consider ethical safeguards (e.g. include compliance and quality
metrics, not just sales or profit). In terms of governance, result controls decentralize decision-making
(empowering managers) but require a governance framework to set appropriate targets and monitor
outcomes. The link between result control and corporate governance appears later (Chapter 15),
when discussing how boards set performance goals for top executives and oversee incentive plans. In
summary, result controls must be implemented with a sense of organizational justice and integrity –
rewarding good performance but not encouraging unethical means to achieve results.
Chapter 3: Action, Personnel, and Cultural Controls
Main Objectives and Key Takeaways: Chapter 3 examines the other major categories of
management controls: action controls and personnel/cultural controls. These controls aim to ensure
that employees behave in the organization’s best interest by directly influencing what people do,
, rather than just the results they produce. The key takeaway is that while result controls are indirect,
action controls are the most direct form of control, and personnel/cultural controls work by
shaping the workforce’s capabilities and values. Organizations often supplement or replace result
controls with these approaches, especially when they either know the specific actions that are
desirable or when they want to create an environment where employees naturally do the right thing.
This chapter teaches that effective control systems frequently rely on a blend of all these types, and
it explores how action, personnel, and cultural controls function, their effectiveness conditions, and
their impact on behaviour.
Action Controls: Action controls involve ensuring employees perform (or avoid) certain actions
known to be beneficial (or harmful) to the organization. In other words, management specifies or
restricts the behaviours themselves. Action controls are only feasible when managers have
knowledge of which specific actions will lead to good outcomes (or which should be prevented) and
can enforce those actions or restrictions effectively. When applicable, action controls provide a very
direct way to achieve control. The chapter identifies four basic forms of action controls:
• Behavioural constraints: These are mechanisms that prevent undesired actions. They can be
physical constraints (locks, passwords, system access controls, automatic blocks) or
administrative constraints (policies like separation of duties, requiring approvals for certain
transactions). For example, a company might physically lock inventory or require dual
signatures on checks to stop theft or errors. Such constraints make it impossible or more
difficult for employees to do what they should not do. This form of action control is largely
preventive and “negative” – it’s about blocking bad behaviour.
• Preaction reviews: These involve approvals or reviews of plans/decisions before action is
taken. Management examines proposed actions (e.g. budgets, investment proposals) and
must sign off before the employee can proceed. This ensures that actions are vetted to be in
line with organizational goals. For instance, a manager might need to get approval for
expenditures over a certain amount or for any deviation from standard procedures.
Preaction reviews are a way for higher-level managers to exercise control by screening
actions in advance using their experience and oversight.
• Action accountability: This form sets rules or procedures for desirable actions and then tracks
whether employees follow them, holding them accountable. It requires defining what actions
(or standards of behaviour) are expected (or forbidden), communicating those to employees,
and then monitoring compliance. For example, salespeople might be required to make a
certain number of client calls per week and report on them, or a factory worker might have a
checklist to follow. If employees deviate from prescribed actions, they may face sanctions; if
they comply or exceed standards, they may be rewarded. Action accountability often
involves documentation and audits to verify that procedures were followed.
• Redundancy: This involves assigning more resources or people to a task than strictly
necessary, as a form of check. Common examples are requiring two people to perform or
review a critical task (dual control) or having back-up personnel to catch errors (e.g. a second
person rechecking calculations). Redundancy increases the likelihood that mistakes or
improprieties are caught or prevented by overlapping efforts. It’s essentially a control
through duplication – for instance, having two pilots in a cockpit or multiple sign-offs on a
project ensures that one person’s lapse can be caught by another.
By employing these forms, action controls directly affect behaviour: employees comply with
constraints and procedures, thereby theoretically doing what is best for the organization. A clear
