Management: Motivation, Control, Budgeting Behaviour and Performance Measurement
What you must know
Management questions combine organisational behaviour with management accounting control. Know the motivation theories: Maslow's hierarchy, Herzberg's two-factor split between hygiene factors and motivators, and expectancy theory linking effort, performance and reward. Understand span of control, centralisation versus delegation, and the Tuckman team stages. On the control side, master responsibility centres (cost, revenue, profit, investment), the controllability principle, budgeting approaches (incremental, zero-based, rolling, activity-based) and the behavioural consequences of targets, including budgetary slack and ratcheting. Know the balanced scorecard's four perspectives - financial, customer, internal process, learning and growth - and the difference between ROI, residual income and EVA for divisional appraisal.
Traps
Pay and working conditions are hygiene factors, so a pay rise removes dissatisfaction without motivating. Participative budgeting reduces slack only if genuine negotiation occurs; done loosely it invites padding. The controllability principle says managers are judged on items they influence, so exclude apportioned head-office charges from divisional appraisal. ROI can cause goal-incongruent decisions: a manager may reject a project earning above the cost of capital because it dilutes the division's ROI, while residual income avoids this. Balanced scorecard questions often mislabel lead and lag measures or assign a customer measure to the internal-process perspective.
Worked example
A division earns 2.0m on assets of 10m; cost of capital is 12%. ROI is 20% and residual income is 2.0 − 1.2 = 0.8m. A new project needs 3m of assets and earns 0.45m, a 15% return above the 12% hurdle. Group value rises, but divisional ROI falls to 2.45 ÷ 13 = 18.8%, so a manager rewarded on ROI rejects it. Residual income would rise to 0.89m, aligning the manager with the firm.
Rule of thumb
Judge a manager on what they control, and choose the metric that makes the manager's best decision the firm's best decision.