The Impact of Targets and Incentive Systems in a Beyond Budgeting Setting

The Impact of Targets and Incentive Systems in a Beyond Budgeting Setting

The impact of targets and incentive systems in a Beyond Budgeting setting A case study of how target-setting and incentive systems are applied in a firm employing Beyond Budgeting principles . JOHAN STEN GUSTAVSEN KRISTIAN FREDRIK HORNNES SUPERVISOR Rafael Heinzelmann University of Agder, 2019 Faculty of Business and Law Department of Economics and Finance Preface This thesis is the result of the 5-year master course in Economics and Business Administration program at the School of Business and Law, University of Agder. The topic is anchored in the specialization of Management Accounting. The background of this study was our interest in the Beyond Budgeting system as a response to new market dynamics and the need for agility. The system challenges established management control systems by focusing on future trends and decentralization. It manages this by abandoning the budget and giving knowledgeable employees decision making power through autonomy and decentralization. However, we wanted to study how concrete control systems were applied to ensure strategic direction and motivation among employees. This led us to research the management controls systems of targets, performance measurement and reward systems. The thesis is based on personal interviews with the employees of the case firm. This gave us insight into both their systems and the opinions of the employees the systems affect. We therefore want to direct our sincere thanks to all managers and employees who participated in the study. Their input and honesty were essential for our understanding and the analytical depth. We also want to include a special thanks to the firm´s CEO, who gave us valuable insight and feedback before, during and after the interview process. In addition, we want to sincerely thank our supervisor, Rafael Heinzelmann, who gave us essential feedback and suggestions throughout the process. His quick responses and assistance were remarkable. Kristiansand, June 3rd, 2019 Johan Sten Gustavsen, Kristian Fredrik Hornnes 2 Abstract The goal of this empirical study is to understand how performance management systems are applied in a firm which has implemented Beyond Budgeting. The thesis focuses on the management control systems of result controls, which includes the process of setting targets, measuring performance and issuing rewards. Collectively these systems are designed to guide and motivate employees, by aligning the goals of both principals and agents. To understand how these systems function in a Beyond Budgeting setting the analysis addresses the problem statement: What is the impact of targets and incentive systems in a Beyond Budgeting setting? The method used is an inductive qualitative case study, were interviews are conducted to gain credible and authentic data on how these systems are applied in the case firm. By applying a theoretical framework, we find the effects of both targets and incentive systems within the firm. The targets that are applied in the firm are specific and effectively communicate strategic direction and goals. However, their impact is limited by certain factors. The targets are not adjusted with the rolling forecasts, and while strategic targets are communicated throughout the organization there is little use of official personal targets. The firm have specific strategies under development to counter these elements. The newer implementation partly follows the Beyond Budgeting system, however the focus seems to be on designing an impactful solution regardless of framework. Consequently, there is less focus on relative targets, but they will be designed as directional and ambitious. Regarding incentive systems, the research identifies that the key factor is designing the systems to fit any given setting. Critical factors were observed to be a clear connection with effort exerted, impact size and timing. However, these factors vary across almost every position in the firm. Hence, simply implementing systems to match the Beyond Budgeting theory did not seem to yield optimal results. The result is that the motivational and guiding impact of these systems are dependent on matching the setting their applied to, more so than a specific system. 3 Table of contents Preface........................................................................................................................................ 2 Abstract ...................................................................................................................................... 3 Table of tables ............................................................................................................................ 6 Table of figures .......................................................................................................................... 6 Chapter 1: Introduction .............................................................................................................. 7 1.1 Report Background. .................................................................................................... 7 1.2 Problem statement ....................................................................................................... 9 1.3 Relevance .................................................................................................................... 9 1.4 Empirical basis .......................................................................................................... 10 1.5 Scope and structure ................................................................................................... 11 Chapter 2: Theoretical framework ........................................................................................... 13 2.1 Developments of Beyond Budgeting as an alternative control system .......................... 14 2.1.1 Management control systems and the budget .......................................................... 15 2.1.2 Critique of the budget .............................................................................................. 15 2.1.3 The Beyond Budgeting system ................................................................................ 16 2.2 The target-setting process............................................................................................... 22 2.2.1 Target criteria .......................................................................................................... 23 2.2.2 Disadvantages of targets .......................................................................................... 27 2.3 Performance Measurement ............................................................................................. 27 2.4 Incentive systems ........................................................................................................... 29 2.4.1 Background and concept of incentive systems ........................................................ 29 2.4.3 Incentive system design ........................................................................................... 33 2.5 Theoretical framework for analysis................................................................................ 38 Chapter 3: Methodology .......................................................................................................... 41 3.1 Field of study .................................................................................................................. 44 3.2 Research design .............................................................................................................. 45 3.3 Data collection................................................................................................................ 47 3.3.1 The Interview guide ................................................................................................. 49 4 Chapter 4: Empirical analysis .................................................................................................. 50 4.1 Historical background and business model. ................................................................... 50 4.1.1Restructuring process ................................................................................................... 51 4.2 Beyond Budgeting implementation ................................................................................ 54 4.3 The target setting process ............................................................................................... 56 4.4 Performance measurement ............................................................................................. 59 4.5 Incentive systems of the firm ......................................................................................... 60 Chapter 5: Analysis .................................................................................................................. 63 5.1 Targets ............................................................................................................................ 63 5.1.1 Specific targets ........................................................................................................ 64 5.1.2 Challenging targets .................................................................................................. 69 5.1.3 Acceptance of targets ............................................................................................... 70 5.1.4 The use of targets to evaluate performance ............................................................. 73 5.1.5 Feedback to targets .................................................................................................

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