Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 6

Each April, it is common to find news articles contrasting executive pay with firm performance. For example, on April 9, 2009, The Wall Street Journal reported that the top three executives at Kilroy Realty (a California property developer and manager) were paid the “highest amount permitted by their compensation agreement in 2008” although occupancy rates declined and share prices fell 39 percent in 2008 and 41 percent (as of the time of the article) in 2009. Why might a firm pay managers high compensation although performance is worsening?

Step 1 of 2

Management control system

Management control system is needed to manage the complications arising out of decentralization like dysfunctional decision making. Owners of the organization use structure and procedures of management control system to influence the actions of its managers and other employees to ensure smooth implementation of organizational strategies. Management controls system comprises of three elements such as delegation for decision making authorities, evaluation of performance and measurement systems and finally awarding compensation and rewards for performance.