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  The Role of Fairness in Management Control Systems 

Cátedra Crèdit Andorrà de Mercados, Organizaciones y Humanismo
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Management control systems are intended to motivate managers to ensure their company’s organizational goals are accomplished.

They do this by rewarding and promoting people according to certain criteria. Usually they are designed to create the greatest goal congruence – i.e., where people in the organization are working toward the same personal objectives as the organization’s.

A new working paper by IESE’s Natàlia Cugueró and Josep M. Rosanas breaks new ground in the study of management control systems, by analyzing the role of organizational justice. What they find is that justice is closely and crucially related to management control systems.

Formal and Informal Fairness
There are two types of fairness that contribute to justice in a management control system: formal and informal.

Formal fairness relates to the design of the management control system. It is the structure managers use to set goals and budgets, assess performance and give rewards.

Informal fairness refers to the way managers actually use the system. This is done on a more discretionary basis, adjusting decisions from a more subjective point of view.

For instance, an organization may have a bonus system that offers incentives for the sales department, but not for those that support the sales team. Over time, the control system may be adapted by managers to become fairer, such as through short-term adjustments or permanent changes to the incentive system.

Both formal and informal fairness are crucial contributing factors in the eventual effectiveness of a management control system.

With this in mind, the authors have created a model to explain the four main ways fairness in a management control system can impact the goal congruence in an organization.

The Four States of Goal Congruence
1. Total goal congruence (formally fair, informally fair). Fair design and use of the formal management control system leads to ideal goal congruence and a high degree of identification among managers and employees in the organization. This situation corresponds with a stable equilibrium, and injustice rarely appears in this kind of system. If it does appear, it is easily put right through built-in provisions applied by the system manager.

2. Occasional goal congruence (formally unfair, informally fair). A more common situation is when goal congruence is occasional and the system, if not formally fair, is used fairly. Evaluative learning takes place: After fixing injustice in the system, managers may start proposing changes to the parts of the system that have proven unfair. This informal fairness can eventually lead to formal fairness and, consequently, achieve the total goal congruence described above.

3. Perverse goal congruence (formally fair, informally unfair). This involves unfair use of a formally fair management control design. Emphasis on rules makes the system more formally unfair, while decision makers learn how to circumvent the system. Both types of dysfunctional learning, by managers and by people calling for more rules, can transform a formally fair system into a formally unfair one. This leads to total goal incongruence and lower levels of identification by individuals within the organization.

4. Total goal incongruence (formally unfair, informally unfair). Unfair use of a formally unfair management control system leads to total goal incongruence. Individuals have no motivation to work for the organization, and negative learning drives the organization toward a more extreme situation of unfairness. Use of the management control system ensures the organization becomes an unjust place to work, and people plan to leave or isolate themselves from their surroundings in order to survive.

The Importance of Stability
Total goal congruence should be the aim of any successful organization. Ensuring fairness in the management control system is vital to this goal, on both a formal and informal level.

The ideal situation in an organization is a fair structure that incentivizes everyone to head in the same direction. Crucially, managers must use this system in a fair way, and not seek to find loopholes or pervert the system.
This article is based on:  ANULADO
Publisher:  IESE
Year:  2011
Language:  English