Employees’ pursuit of self-interest creates more than just motivational problems. Self-serving behavior can lead employees to take actions, either intentionally or unintentionally, that diminish or destroy organizational value. In other words, employee control problems derive from a lack of motivation as well as a lack of direction. Organizations rely on management controls to mitigate both of these risks. Effective management control systems encourage employees to work hard and smart. In this chapter, we focus on the second role management control systems play in employee management: directing employee effort toward the achievement of organizational objectives.
Directing Role
If management motivates employees to work hard but neglects to channel that effort into desired outcomes, the likelihood that employees undertake undesired actions remains a significant threat to the organization’s operations. Imagine a retail organization, where cashiers are willing to exert high levels of effort. One morning, a manager discovers that the evening shift of cashiers had unpacked and stocked inventory but did so incorrectly. Such situations are understandably frustrating for managers as well as any employee stuck “cleaning up the mess.” And, if left unresolved, what is initially a minor issue could compound into a serious control problem. The silver lining in this case, however, is that employees are motivated. Specifically, the cashiers chose to work on unloading inventory, when they could have chosen to waste time watching Netflix on their phones. Thus, the control problem is a lack of direction, as the employees did not know how to properly channel their effort.
When management control systems influence employees’ behavior, they affect not only how willing employees are to perform but also how constructive that performance is. Each management control, however, does not need to have both effects per se. A single control can: (a) primarily motivate employee effort, (b) primarily direct effort to desired outcomes, or (c) both activate and direct effort simultaneously. The collective effect of all management controls must be that employees are both motivated and directed properly for the threat of employee conflicts to be considered sufficiently managed.
We follow Bol and Loftus by stating that employee effort is properly directed if three conditions are met:1
1. Employees have an understanding.
2. Employees have the capabilities.
3. Employees have the right preferences.
In the following, we describe what perfect fulfillment of each condition would look like. Obviously, as with all other aspects of control, perfection does not exist. Controls that improve the direction of employee effort should be, like other controls, considered in light of the costs associated with creating those improvements.
Understanding
Do employees understand what the desired tasks are and why? For an organization to be successful, employees must clearly comprehend what the strategy entails and how to properly prioritize objectives. Employees are more likely to perform desired tasks if they understand why the actions are vital to the fulfillment of organizational objectives. In other words, how does the employee’s contribution advance the organization’s mission? Furthermore, employees must know which tasks to prioritize, and if desired tasks are not explicitly defined, employees must know the order of objectives to pursue. Lastly, employees should thoroughly understand the expectations of the job in terms of both conduct and ability.
Deficiencies in employees’ understanding may result from inadequate guidance or inaccurate and potentially contradictory messages regarding the organization’s strategy, objectives or priorities. Management controls can increase employees’ understanding in many ways. For example, controls that communicate the organization’s strategy, objectives, values and priorities inform employees of the organization’s desired outcomes and can provide insight into how employee actions contribute to those outcomes. Furthermore, controls that create understanding (e.g., training, codes of conduct, mission statements, etc.) may be particularly important in organizations in which top management may not have complete information about how specific employee actions contribute to desired outcomes. This tends to be the case in organizations where the primary focus is on knowledge-intensive products and services, such as a consulting firm, rather than on concrete or observable ones. Thus, as these organizations continue to grow in number, controls that promote understanding become increasingly important.
Capabilities
Can employees perform the desired tasks? To accomplish any task, employees need to have both the necessary skills and tools. Employees should have not only the technical knowledge and problem-solving skills but also the social and emotional intelligence to perform their tasks proficiently. In addition, management must equip employees with the required tools. These can vary from tangible tools, like tractors or sketch pads, to intangible tools, like data-analysis programs or expert assistance. To use tools strategically, employees must also be informed decision makers. That is, employees must be provided the critical data and other pertinent information or the means to acquire such information. Lastly, adequate time to perform assigned tasks must be provided, as employees will not be able to properly execute their tasks if the work schedule does not allocate enough time.
Management controls can ensure employees possess the required capabilities in several ways. For example, selective hiring policies make sure employees who demonstrate proficiency in the desired tasks are selected, while training programs confirm employees have the relevant knowledge and skills to perform these tasks. Regular upgrades to computer hardware and software, which maintain the utility of the tools needed to perform the desired tasks, is another example. In organizations where employees’ tasks are not clearly defined, top management will likely be less certain which tools, training, or information need to be provided. Considering the current knowledge-based economy, designing management control systems that provide employees with the required capabilities is therefore not a trivial task.
Preferences
Do the employees want to perform the desired tasks? Even if employees understand and can perform their assigned tasks, this unfortunately does not necessarily mean that employees intend to perform these tasks. An organization might hold compelling strategic objectives, yet employees may be unintentionally provided with incentives to prefer other tasks. Consider, for example, an auditor. Although auditing firms emphasize audit quality as a primary objective, auditors often are offered social affirmation or even a financial incentive, such as annual bonuses, to meet the budget. Since auditors, like other employees, have a preference to undertake actions that lead to rewards, auditors will likely focus on meeting the budget, even if audit quality suffers in result. Thus, capable employees who know the importance of an objective, such as audit quality, might still choose to focus their effort elsewhere. It is important to note that the desire for financial rewards is not the only factor that shifts employees’ preferences. To continue with our auditing example, auditors may be intrinsically inclined to focus on exciting tasks that only marginally contribute to audit quality, such as presenting audit findings, at the expense of tedious tasks with meaningful impact, like pushing back on client estimates.
Disparity in preferences can result both in actions that are less beneficial to the firm and actions that undermine organizational objectives. Fortunately, employee preferences are malleable; they are shaped by the controls established within an organization. Employees will prefer, and therefore choose, alternative actions to those desired by the organization when they receive more rewards, financial or feeling-based, for the alternative actions. For example, information technology employees may prefer to direct their effort toward investigation tasks—at the expense of documentation tasks desired by the organization—due to the intrinsic rewards of investigation. This means that without deliberate examination of the combination of rewards provided within the organization, and the resulting employee preferences, it is unlikely that the rewards that motivate effort also perfectly direct effort toward the organizational objectives.
Importantly, systems thinking must be applied when considering adjustments to the management control system. Adding a control to direct effort toward the right tasks can have unintended consequences. For example, when an intensive monitoring system is implemented to ensure that employees are focusing their effort on the right tasks, employees can become demotivated, as micromanagement cultivates a lack of trust. Thus, we caution that a control added to improve the direction of employee effort can negatively affect employee motivation, and vice versa.