Behaviour, incentives and rewards

Accounting Ahead | Original study resource | accountingahead.com.au

Behaviour, incentives and rewards

MODULE 5 | PART C.3 | STUDENT COMPANION

How controls are used

Diagnostic control

Feedback against plan

Correct deviations

Managers step in by exception

Interactive control

Senior managers involved in staff decisions

Signals what really matters

Stronger influence on behaviour

Participation in target setting builds commitment; imposed targets rarely motivate

Power and culture

Idea Remember

Culture Shapes which measures exist (tight accounting control vs short-term profit focus)

Dominant coalition The most powerful group - finance, engineering or sales - may differ from the

organisation chart

Why measures persist Systems take hold when they fit power, culture and shared views about goals and

technology

Six dysfunctional behaviours

Tunnel vision

One target, nothing else

Sub-optimal behaviour

Hit the target, then stop improving

Substitution

Less effort where no one is watching

Measure fixation

Chase the number, not the performance

Gaming and biasing

Make results look better - even falsify

Smoothing

Shift results between periods

Sources of bias: the reward system, recent practice and norms, managers' insecurity

STRATEGIC MANAGEMENT ACCOUNTING | M5 PART C.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

When the measure lies

0 days

25 days

50 days

75 days

100 days

125 days

24 days

Reported average wait

115 days

Actual average wait

Phoenix VA health system, 2014 (days)

About 1,700 veterans waiting for care were not on the official list (VA inspector general, May 2014)

Case note: the US Department of Veterans Affairs had a 14-day appointment goal, with bonuses linked to

wait-time performance. The inspector general found the Phoenix system reported an average 24-day wait

against an actual 115 days, and that scheduling problems were systemic; Secretary Eric Shinseki resigned on

30 May 2014.

Sources: VA Office of Inspector General interim report (28 May 2014) as reported by NPR and KFF Health News; Defense One and CBS

News, 30 May 2014.

Designing incentives and rewards

Carrots and sticks

Financial and non-financial rewards; sanctions from lost

bonuses to dismissal

Short and long term

Defer part of the reward until performance is sustained

Timing

Close enough to link reward to effort - not so fast it breeds

short-termism

Group or individual

Individual needs controllability; interdependent work suits group

rewards

Watch the handover problem: a manager who cuts maintenance, training or marketing may be rewarded and

promoted, leaving a successor who looks worse while repairing the damage. Profit-based group bonuses build

teamwork and align with shareholders, but individual influence is small and pressure can encourage gaming.

STRATEGIC MANAGEMENT ACCOUNTING | M5 PART C.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Practice questions

MODULE 5 | PART C.3 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Name the behaviour

Situation Behaviour

(a) A help desk closes tickets before problems are fixed to meet a 'tickets

closed' target

(b) A team stops improving once it hits its quarterly target

(c) Sales staff ignore after-sales service because only sales are measured

(d) A manager shifts December sales into January to even out results

(e) A hospital focuses only on emergency waiting times while surgery lists grow

Question 2 - Design an incentive

Design an incentive scheme for the regional managers of a home-care provider that rewards growth without

encouraging rushed visits or falsified records.

STRATEGIC MANAGEMENT ACCOUNTING | M5 PART C.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Question 3 - Group or individual?

Should a surgical team be rewarded individually or as a group? Explain using controllability and

interdependence.

STRATEGIC MANAGEMENT ACCOUNTING | M5 PART C.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 5 | PART C.3 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Name the behaviour

Situation Answer

(a) Gaming (and measure fixation)

(b) Sub-optimal behaviour

(c) Substitution

(d) Smoothing

(e) Tunnel vision

Question 2 - Design an incentive

Balance growth (new clients, hours delivered) with quality (client satisfaction, care-plan audits, complaint rates)

and staff measures (retention, training). Use audited data and random record checks; defer part of the bonus a

year and tie it to sustained quality; add non-financial rewards (recognition, development); and use measures

interactively, discussing results with managers rather than only ranking them.

Question 3 - Group or individual?

Group. Surgical outcomes depend on highly interdependent work (surgeons, anaesthetists, nurses), so

individual contributions are hard to isolate and individual rewards could undermine teamwork. Team rewards on

outcomes, safety and patient experience fit, with individual development recognised separately.

STRATEGIC MANAGEMENT ACCOUNTING | M5 PART C.3 | WORKED ANSWERS

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