Control is present to a greater or lesser degree, in almost all forms of business action. Administrators spend a good part of their time observing, reviewing and evaluating the performance of people, methods and processes, machines and equipment, raw materials, products and services, in all three levels of organization of the company. In this way, controls can be classified according to their performance in these three organizational levels in three categories:
The measurement of performance is a crucial part of evaluation and control. The lack of quantifiable objectives or performance standards and the inability of the information system to provide timely and valid information are two evident control problems. Without objective and timely measures, it would be extremely difficult to make operational decisions, much less strategic ones. However, the use of timely and quantifiable standards does not guarantee good performance. The same action of monitoring and measuring performance could cause adverse effects that interfere with overall corporate performance. Among the most frequent adverse effects we can mention the short-term orientation and the displacement of goals.
Senior managers report that, in many cases, they do not analyze either the long-term implications of current operations on the strategy they have adopted or the operational effect of a corporate mission strategy. Long-term evaluations are not carried out frequently because managers:
They have not realized its importance.
Believe that short-term considerations are more important than long-term ones.
Are not personally evaluated based on the long term or.
Do not have the time to do a long-term analysis.
There is no real justification for the first and last reason. If managers recognize the importance of long-term evaluations, they will try to find the time necessary to carry them out. Although many executives point to immediate pressures from the investment community and short-term incentives and promotion plans as responsible for the second and third reasons, the evidence does not always support their arguments.
Many accounting-based measures encourage short-term guidance in which managers consider only current tactics or operational issues and ignore long-term strategic issues. One of the limitations of ROl as a measure of performance is its short-term nature. In theory, the ROI is not limited to the short term, but, in practice, it is often difficult to use this measure to determine the long-term benefits of a company.
Because managers can frequently manipulate both the numerator (earnings) and the denominator (investment), the resulting ROI figure may be unrepresentative. Advertising, maintenance and research efforts can be reduced. The calculations of pension fund benefits, outstanding accounts receivable and old inventory are easy to adjust.
Optimistic calculations of returned products, bad debts and outdated inventory inflate sales and profits for the current year. Expensive remodeling and modernization of plants can be delayed as long as an administrator can manipulate the production defects and absenteeism figures.
Mergers that favor the current year’s earnings (and the next year’s check) may be carried out to the detriment of the future benefits of the division or corporation. For example, an investigation among 55 companies that made large acquisitions revealed that, although the new firms had a bad performance after the acquisition, the high-level management of the acquiring companies continued to receive significant increases in their compensation.
The determination of the compensation of the CEO based on the size of the company and not the performance of it is common and very likely in companies that are not closely supervised by independent analysts. The research supports the conclusion that many CEOs and their friends who are part of the board compensation committee manipulate the information to grant a salary increase.
If not done properly, monitoring and measuring performance can cause a decrease in overall corporate performance. Goal shifting is the confusion of means with ends and occurs when the activities, which were originally intended to help managers achieve corporate objectives, become ends in themselves or are adapted to meet different purposes for which they were destined. Two types of goal shifting are performance substitution and sub optimization.
Performance substitution refers to a phenomenon that occurs when staff substitute activities that lead to achievement of goals for activities that do not lead to their achievement because they reward the wrong activities. Administrators, like most other staff, focus more on performance that is clearly quantifiable than performance. Frequently, employees receive little or no recognition for participating in activities that are difficult to measure, such as cooperation and initiative. However, activities that are easy to measure may have little or no relation to the desired good performance. All in all, rational people tend to work for the rewards offered by the system.
Consequently, they replace the performances that are recognized and rewarded by others that are underestimated, regardless of their contribution to the achievement of goals. A research study conducted among 157 corporations revealed that most companies made few attempts to identify areas of non-financial performance that could boost their chosen strategy. Only 23% constantly created and verified cause and effect relationships between intermediate controls and business performance.
Sub optimization refers to the phenomenon in which a unit optimizes its achievement of goals to the detriment of the organization in general. The importance given by large corporations to the development of independent accountability centers can create some problems for the entire corporation. To the extent that a division or functional unit considers itself as a separate entity, it may refuse to cooperate with the other units or divisions of the same corporation if, in some way, the cooperation could adversely affect the evaluation of its performance.
Inter-divisional competition to achieve a high ROI can result in a division refusing to share its new technology or improvements in work processes. The attempt of a division to optimize the achievement of its goals may cause others to be left behind and negatively affect overall corporate performance.