Behavioural aspects of management control

1 Introduction

Control of an organisation’s performance ultimately depends on the people who work in it. Strategies, budgets and targets achieve nothing by themselves – they work only if people are willing and able to act on them. That is why this part of the syllabus treats human capital as one of the organisation’s key intangible assets: in an economy where value is created mainly from knowledge, skills and relationships, managing people’s performance is managing the organisation’s performance.

By ‘control’ we do not mean ordering people about and watching them constantly. Performance has to be managed so that the organisation achieves what it needs to achieve – but there are many ways of doing that, from close supervision at one extreme to trust, empowerment and self-management at the other. Choosing the right approach for the right people is what this chapter is about.

We look first at what motivates people (McGregor, Maslow, Herzberg and Vroom), then at the practical levers managers can pull: rewards and sanctions, job design, empowerment and engagement, target setting, and management by objectives. The chapter closes with the ethics of performance management – because targets and rewards shape behaviour, and not always for the better.

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2 Motivation and performance

Motivation is the strength of a person’s willingness to put effort into their work. Performance depends on more than motivation alone – people also need the ability to do the job and the opportunity and resources to do it – but of the three ingredients, motivation is the one that day-to-day management most directly affects.

Theories of motivation fall into two broad families:

• Content theories ask what motivates people – what needs and rewards drive effort. Maslow and Herzberg are content theorists.

• Process theories ask how motivation happens – the reasoning people go through when deciding how much effort to make. Vroom’s expectancy theory is a process theory.

3 McGregor: Theory X and Theory Y

McGregor identified two extreme sets of assumptions that managers make about their staff, which he called Theory X and Theory Y. You might remember the Ashridge model of management styles from Chapter 2 – tells, sells, consults, joins – running from autocratic to participative. Theory X and Theory Y represent the assumptions that sit behind the two ends of that range.

• The Theory X manager assumes that people fundamentally dislike work: they are there reluctantly, because they need the money, and will avoid effort and responsibility if they can. A manager holding these assumptions supervises closely, controls tightly and relies on rules and discipline. There is little trust in either direction.

• The Theory Y manager assumes that work is as natural to people as rest or play: employees want to do a good job, will exercise self-direction towards objectives they are committed to, and will accept and even seek responsibility. A manager holding these assumptions consults, delegates and trusts subordinates to carry out their work well.

McGregor deliberately chose the neutral labels X and Y rather than ‘Theory Wrong’ and ‘Theory Right’. His point was contingency: if you manage people who genuinely find their work dull and are there only for the wage, close Theory X supervision may get the best available performance. If you manage well-qualified professionals who are used to being consulted and expect autonomy, a participative Theory Y approach will motivate them far better – and close supervision would drive them away.

So motivation is a matter of fit. Different people, and different kinds of work, call for different managerial approaches – a theme that runs through the whole of this chapter.

4 Maslow: the hierarchy of needs

Maslow argued that people are motivated by five kinds of need, arranged in a hierarchy. The lower needs must be reasonably satisfied before the next level up begins to motivate; and once a need is satisfied, it stops motivating – offering someone more of what they already have enough of achieves little.

The practical message for managers is to ask which level an employee is currently working at. Offering team-building events (social) to someone worried about redundancy (safety) misses the point; offering yet more pay to a secure, well-paid professional may motivate less than offering challenge and recognition.

Treat the hierarchy as a useful way of thinking rather than a proven law. People do not climb it in strict order – an artist may starve for self-actualisation – the same reward can serve different needs for different people, and the ordering of needs varies between people and between cultures.

5 Herzberg: the two-factor theory

Herzberg investigated what made employees satisfied and dissatisfied at work, and found – strikingly – that the two lists were different. The factors whose absence causes dissatisfaction are not the same as the factors whose presence creates positive motivation. He called them hygiene factors and motivators:

The name ‘hygiene’ is a medical analogy: good hygiene prevents disease but does not make anyone healthier. Similarly, fixing pay, conditions and supervision stops people being dissatisfied, but to motivate them you must build achievement, recognition, responsibility and growth into the job itself. That conclusion leads directly to job enrichment, covered below – and it explains why pay is a weaker motivator than managers often assume.

6 Vroom: expectancy theory

Vroom’s expectancy theory is a process theory: it describes the calculation, conscious or not, that a person makes before deciding how much effort to exert. Motivation is the product of three beliefs:

• Expectancy – ‘If I try harder, will my performance actually improve?’ Effort must credibly lead to performance: the person needs the skills, resources and a realistic target.

• Instrumentality – ‘If I perform, will I actually receive the reward?’ The link between performance and reward must be trusted. Promised bonuses that never materialise destroy instrumentality.

• Valence – ‘Do I actually value the reward on offer?’ The reward must matter to that individual – more money, promotion, time off, recognition: people differ.

Because the three multiply together, if any one of them is zero, motivation is zero. An achievable target, a reward link that is honoured, and a reward the person actually wants are all necessary – remove any one and effort collapses. This gives managers a practical checklist, and we shall meet it again when we look at target setting.

7 Intrinsic and extrinsic rewards

Motivational influences can be classified as intrinsic or extrinsic rewards:

• Intrinsic rewards come from within the person and the work itself: a sense of achievement, challenge, personal growth, self-fulfilment. They correspond closely to Herzberg’s motivators and to the top of Maslow’s hierarchy.

• Extrinsic rewards come from outside: pay, bonuses, praise, promotion, benefits. They correspond broadly to Herzberg’s hygiene factors and the lower and middle levels of the hierarchy.

Both types have a place in managing employees. Extrinsic rewards get people through the door and keep them from leaving; intrinsic rewards are what sustain high performance once they are there.

8 Increasing motivation: participation and job design

How, practically, can managers increase motivation?

The first approach is participation. Elton Mayo’s investigations in the 1930s suggested that taking an interest in people, asking their opinions and letting them contribute to decisions is itself motivating. Contributing to problem-solving and decision-making provides strong intrinsic rewards – and, as we saw with target setting below, people are far more committed to decisions they helped to make.

The second approach is job design – changing the job itself. There are three classic forms, though only the third does much for motivation:

• Job enlargement means more of much the same – a horizontal change with no extra challenge or responsibility. If you fit the front wheels in a car factory, job enlargement has you fitting the back wheels too.

• Job rotation is also horizontal: you move between tasks of similar difficulty – wheels this week, headlights next week, exhausts the week after. At best it relieves boredom and builds flexibility.

• Job enrichment is a vertical change: the job gains genuine extra responsibility and challenge. The wheel-fitter is also made responsible for a quality-control check, inspecting paintwork and reporting defects. This is the approach Herzberg’s theory points to – it builds achievement, responsibility and recognition into the work itself.

9 Pay as a motivator

Finally on the theory of motivation: to what extent do wages and salaries motivate? Herzberg classified pay mainly as a hygiene factor – pay that is felt to be inadequate or unfair actively demotivates, but beyond that point more pay does not buy sustained extra effort. For pay to motivate at all it must be linked to effort or achievement, and there are practical difficulties in doing that:

• Businesses rarely have a free hand on pay. They must consider what they can afford and the market rate; paying ever more than inflation simply prices people out of their jobs.

• Many large organisations have strict pay bands: employees at a given grade are paid within that band however good they are, which weakens the pay–performance link (and, in Vroom’s terms, destroys instrumentality).

• Performance-related pay needs performance that can be measured fairly and attributed to the individual. In most organisations results depend on many people, so individual bonuses can feel arbitrary, and team-based rewards invite free-riding by weaker contributors.

None of this means pay does not matter – it matters greatly as a source of fairness and security. It means that pay on its own is a blunt motivational instrument, and that managers should not expect a pay rise to substitute for interesting work, recognition and growth.

10 Rewards and sanctions in managing performance

Organisations steer behaviour with both rewards and sanctions:

• Rewards may be financial (salary, bonuses, profit-sharing, share schemes) or non-financial (praise and recognition, development opportunities, more interesting work, flexible working, promotion). An effective reward system rewards the behaviour the organisation actually wants, is seen to be fair and consistent, and offers rewards that recipients value – Vroom’s valence again.

• Sanctions range from withholding rewards (no bonus, no promotion) through formal warnings to, ultimately, dismissal, applied through the disciplinary procedures described in Chapter 3. Sanctions are necessary as a backstop – persistent underperformance and misconduct must have consequences – but a control system that relies mainly on sanctions produces, at best, grudging compliance: people do the minimum that avoids punishment.

Commitment – people giving their best because they want to – comes from the positive levers in this chapter: meaningful work, fair reward, recognition, empowerment and engagement. That is where we turn next.

11 Empowerment and engagement

11.1 From delegation to empowerment

Delegation, covered in Chapter 2, is giving a subordinate the authority to carry out a defined task, while the manager retains overall accountability. Empowerment goes further: genuine decision-making authority and discretion pushed down the organisation as a permanent feature of the job. The concept itself – what real empowerment requires, its benefits and its risks – is covered with power, authority and delegation in Chapter 2. What matters in this chapter is why it motivates: empowered work has responsibility, judgement and visible results designed into it – job enrichment on a large scale, and pure Theory Y.

In motivational terms, empowerment delivers exactly what the theories in this chapter predict: achievement, recognition and responsibility (Herzberg's motivators), higher-level need satisfaction (Maslow), and a strong effort–performance link (Vroom – people can actually influence the result). But it motivates only when it is real and supported: 'empowerment' without the skills, information and clear boundaries described in Chapter 2 – or imposed on people who do not want extra discretion – is experienced as being dumped on, and demotivates.

11.2 Employee engagement

Employee engagement is the emotional commitment an employee feels to the organisation and its goals – the difference between turning up and doing the minimum, and caring enough to give discretionary effort: the extra effort, ideas and care that nobody can be forced to provide. Engagement is not the same as satisfaction: a satisfied employee may be perfectly comfortable – and coasting; an engaged one is energised and contributing. Engaged employees stay longer, serve customers better, have fewer accidents and are more productive; disengaged employees quietly do the minimum, and actively disengaged ones spread their discontent.

The main drivers of engagement are:

• Meaningful work – understanding how your job contributes to a purpose you believe in.

• Voice – being listened to; having a genuine say in decisions that affect your work.

• Recognition – effort and results being noticed and appreciated.

• Development – the chance to learn, grow and advance.

• Fair reward – pay and benefits felt to be equitable.

• Good line management – day-to-day treatment by one’s immediate manager, consistently found to be the single strongest influence – people join organisations and leave managers.

Engagement is usually measured through regular engagement surveys – from annual surveys to frequent short ‘pulse’ surveys – supported by indicators such as staff turnover, absenteeism and exit interviews. Some organisations track a single headline indicator – how likely employees would be to recommend the organisation as a place to work, scored like a net promoter score. Measurement matters more, not less, in a digital world: with remote and hybrid working a manager can no longer sense the mood of the office by walking through it, so organisations must ask deliberately – and, crucially, be seen to act on what they hear. Surveys that lead to nothing disengage people faster than no surveys at all.

12 Target setting and employee alignment

Targets translate the organisation’s objectives into something each team and individual can act on. Alignment means that targets cascade coherently: organisational objectives are broken down into divisional, team and individual targets such that, if everyone achieves theirs, the organisation achieves its own – and each employee can see how their target contributes to the whole, which is itself motivating (it makes work meaningful).

However they are set, targets should be SMART:

• Specific – so that you know precisely what is expected of you

• Measurable – to eliminate subjectivity

• Achievable/agreed – so that you are committed to reaching the target

• Relevant – to your role (so that you can influence the result) and to the organisation’s objectives (so that achieving it actually helps)

• Time-limited – for example, what you should achieve within the year

Targets can be set in two principal ways:

• Top-down: managers impose targets on subordinates – an autocratic, Theory X approach.

• Bottom-up: subordinates propose targets which are then negotiated and agreed with their managers – a participative, Theory Y approach.

In general the bottom-up approach is more effective. An imposed target is easy to disown – ‘it was never realistic, it was never explained’ – and although the threat of discipline can make people take notice of it, it will not make them enthusiastic. A target you proposed and negotiated is very hard to disown later; participation in setting it is itself motivating. The manager’s role in a bottom-up process is to challenge proposals, because people naturally build in slack.

A second question is how difficult the target should be:

• Too easy, and it drags performance down – people stop when the target is met.

• Too difficult, and people give up trying (in Vroom’s terms, expectancy falls to zero).

• What is needed is a target that is challenging but achievable, so that employees are stretched, motivated – and feel genuine achievement when they succeed.

13 The performance management cycle

The elements of this chapter and the next few fit together as a continuous cycle:

Objectives are set and aligned; performance against them is monitored and reported during the period, so that problems surface early rather than at year-end; performance is reviewed with feedback and coaching (the appraisal process is covered in Chapter 3); and outcomes feed into rewards, or corrective action, and into the next period’s objectives. Many organisations now supplement the traditional annual cycle with frequent, informal check-ins – continuous performance management – because a year is far too long to wait to discover that someone is struggling or drifting off course.

14 Management by objectives

The term ‘management by objectives’ (MBO) was first used by Peter Drucker. It is a management model that aims to improve performance by defining objectives that are agreed by both management and employee – the systematic, organisation-wide application of the ideas above.

There are two elements to the approach:

• Employees understand and help to determine their objectives. How to achieve them is then substantially left to the employee, with management taking a relatively hands-off approach. This independence, and the satisfaction of achieving an objective you own, is strongly motivating.

• Objectives are co-ordinated by management so that, if every unit achieves its objectives, the organisation achieves its overall objectives – each department’s objective is a piece of the same jigsaw.

Because the objectives are agreed rather than imposed, MBO should secure participation and commitment as well as alignment. The same thinking survives today in the ‘objectives and key results’ (OKR) frameworks used by many technology companies: a small number of agreed objectives, each with measurable key results, set and reviewed frequently.

15 The ethics of targets and rewards

Targets and rewards are powerful precisely because they change behaviour – and they change it whether or not the behaviour is what the organisation intended. Performance management therefore has an ethical dimension that the syllabus links directly to leadership (see also Chapter 2):

• Gaming and manipulation. People meet targets in unintended ways: booking sales early, delaying costs, cherry-picking easy customers, or simply mis-reporting results. Several corporate scandals began with unrealistic targets aggressively enforced – staff opened fake customer accounts or mis-sold products because the targets left them, they felt, no honest way to succeed.

• Measure fixation. What gets measured gets managed – and what is not measured gets neglected. Reward only this quarter’s output and quality, safety, training and long-term customer relationships quietly decay.

• Fair process. Rewards and sanctions must be applied consistently and transparently; monitoring of employees (including surveillance of remote workers’ screens and activity) must be proportionate and honest, or it destroys the trust on which engagement depends.

Leaders set the tone: achievable targets, balanced measures, and a clear message – backed by example – that how results are achieved matters as much as whether they are achieved. For CGMA students there is a personal dimension too: the CIMA Code of Ethics (integrity, objectivity, professional competence and due care, confidentiality, professional behaviour) applies directly when you are asked to report performance ‘flexibly’ so that a target appears to have been met. Integrity is not negotiable, whatever the bonus scheme says.

16 Test your knowledge

Two quick checks before you move on: run the flashcards to fix this chapter’s definitions and frameworks in mind, then attempt the ten objective questions to see whether you can apply them.