Management Control System Process

Step 1: Setting Performance Standards

Performance standards may be set by staff or managers, by managers and staff,

or by managers with input from employees whose performance is being
measured. The last method is the best because employees believe that line and
staff do not have enough information about the conditions of various jobs to set
realistic standards.

Managers should see that objectives and standards are measurable and that
individuals are held accountable for their accomplishment. The level of difficulty
should be challenging but within the capabilities of the employee. Standards set
too low are usually accomplished but not exceeded, while standards set too high
usually do not motivate the employee to expend much effort to reach the goal.

It is important that standards be complete; however, it is difficult to develop a

single standard or goal that will indicate the effective overall performance. For
example, consider the automobile dealer who decided to measure sales peoples
performance on the basis of the number of automobiles sold. Sales increased
impressively, but it was later learned that many sales had been made to poor
credit risks, and too high prices had been allowed on trade-ins.

Finally managers should see that the number of standards assigned, like planning
objectives, are limited and placed in priority order for the employee. If there are
too many controls assigned, the employee will not be able to give enough
attention to any of them and will become frustrated and confused.

Step 2: Measure and compare actual with planned results

As with setting standards, the objectivity of the measurement and the person who
measures and compares the performance are important. Measuring and
comparing can be accomplished by the person performing the task, by the boss,
or by a staff person; even an automated system can measure and compare. From
a behavioral standpoint, the last method is the least popular, followed by
measurement by a staff person only.

An employee believes an automated system, a staff person, or even the boss does
not know enough about the conditions of the job to make a fair comparison
between actual and planned results.

Also, the employee often distrusts the staff person and sometimes even the boss.
At the same time, the employee is usually not trusted enough by the company to
perform the measurement and comparison alone. The best solution is to have the
measurement done by the person most trusted by the employee and to allow the
employee some input.
Step 3: Evaluate results, give feedback and coach

The third step is most effective when steering controls are selected. With these
controls, forecasters of the results can also be used for early warning that specific
actions may be required.

For example, high morale is a popular goal but one that is difficult to measure.
Forecasters such as number of accidents, absenteeism, and employee turnover
may be evaluated together and serve as a surrogate measure for increasing or
declining morale.

However, careful evaluation must be used. If the accident rate increases rapidly
in the production area, it would suggest declining morale when a significant
increase is caused by employee carelessness. However, if the cause is related to
equipment that suddenly wears out, then there probably is not a relationship
between accident rate and low morale.

It is essential that managers carefully evaluate deviations before taking action. It

is also important that they remember that deviations can be positive as well as
negative and that they reward employees for positive deviations. Unfortunately,
this step is often omitted and only the negative aspects of deviation receive
attention.

Who should receive feedback from this evaluation and how often should it be
offered?

• The person who is accountable for accomplishing the standard should

receive the information first.
• The employee's boss, or whoever is in a position to reward the employee
should receive the information at about the same time or a little later.
• Then peers, staff people, subordinates and other line people can receive
the information. At this time, the boss ought to have some suggestions
about how to get back on course if the employee needs help.

The boss's most important job is coaching subordinates and a good planning
control system provides an excellent framework for such coaching.

Feedback must be reliable, relatively frequent, and prompt. The feedback has to
be reliable for the employees to be able to change the behavior or plan in order to
get on course. Frequency of information has to do with the interval for which data
are received.

If, for instance, costs would not normally get out of control in a short period, then
monthly reports might be adequate. On the other hand, a delay of 6 months
might allow the situation to get so far out of control that it would be too late to
take corrective action.
Sometimes prompt feedback can create problems. Today's computer-based
control systems can provide feedback on a real time basis, but such speed can be
harmful from a behavioral standpoint. This kind of speed causes undue pressure
because there is no time for the manager to use discretion and make changes.

Step 4: Take corrective action

Making changes as the activity is in progress is a form of corrective action. The

real correction occurs when warnings raised by the forecasters or predictors are
confirmed.

The corrective action can be changing objectives, standards, plans, and the like,
but it can also be penalizing employees when the objectives, standards, and plans
are determined to be appropriate and employees have not met them.

However, there usually are several alternative corrective actions that can be taken
and often more than one will prove effective. The planning control system is not
effective until corrective action is taken and this action begins a new planning-
control cycle.