University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
The relationships between budget targets and performance evaluation procedures of HCC Industries
Ideally, the relationship between budget targets and performance evaluation procedures in any profit making organization is always quite close. The HCC Industries, therefore, are no exception. This is owed to the fact that it is the extent to which the targets of an organization are being met that defines the level of performance of that particular organization. Profit is one major tool that was used to evaluate the performance of HCC Industries. Profit was the most important criterion that was used in evaluation procedures. It is important to note that it is not how high the profits were. Rather, it was used as an evaluation tool through profit targets. These targets served as a goal or objective for the industries. Essentially, the achievement of profit targets was used to evaluate the performance of the industries. Besides profit, there were other performance evaluation tools that were used by the industries and among them were shipments, bookings, efficiency, delinquencies, rework aging as well as returns. CITATION Pau08 l 1033 (Collier, 2008)The importance of the role played by the managers of HCC Industries in the relationship between budget targets and performance evaluation procedures cannot be underestimated. The managers played a very important role indeed. As a matter of fact, the managers kept the whole process of attaining targets in check. To matters into perspective, it was the responsibility of the management to negotiate the standards of performance that ought to be met. These standards basically consisted of budget targets. All this was in the process of planning. However, this entire process came along with numerous challenges on the part of the managers. The argument that often arose was the ability of managers to make good budgeters since most of them tried to keep it safe by coming up with budgets that were described as somewhat conservative. This led to the review of managerial budgets through the board of directors. CITATION Dan12 l 1033 (Chandana, 2012)All in all, the mangers played a very important role when it came to setting up of budgets and targets. The relationship between these targets and budgets with performance evaluation was quite clear. The managers practically monitored the performance of the industries to the latter. A good example of one such manger was Al Berger, a very prudent cooperate manager who constantly contacted division managers to make a review of the various performance reports critically. Quarterly results were greatly emphasized and there was to be no room for mistakes at all. Evaluation was primarily based on the level to which the performance targets were met in the seven areas that have been mentioned above, that is, profits, shipments, bookings, efficiency, delinquencies, rework aging as well as returns. This was determined by the managers and their judgment. They set performance targets and monitored the extent to which these targets were met by performance evaluation. This is the relationship that existed between budget targets and performance evaluation procedures of HCC Industries. CITATION Nor10 l 1033 (Mackintosh, 2010)The stretch budgeting concept was a concept that the HCC Industries were based on for a very long time as the basis of improving their performance every financial year. In essence, this concept meant that the cooperate managers set high targets for the division managers in such a way that the mangers to strive hard to accomplish these targets and as such elevate the performance of the industries, that is, the managers would stretch out to realize the set targets hence the name stretch budgeting concept. Important to note is that under this concept, managers were paid a 30 % bonus in the event that they were able to realize the set objectives. As a matter of fact, they were paid on quarterly basis even though the performance was evaluated annually. This was a great incentive for the managers since the bonus was paid before taxation and as such, they were rewarded handsomely for their efforts. CITATION Chr11 l 1033 (Chapman, 2011)It did not take long before the management of the industries realized a lot of discrepancies with the stretch budgeting concept. One major reason behind this was the fact that the concept was clearly known to be a very optimistic means of achieving certain targets. Owing to this fact, some managers found it to be so okay not to attain the set targets since they were too optimistic. Besides, as much as some managers were able to attain the set targets, it should also be noted that some were not. At the end of the day, the targets for the entire organization were not achieved due to these inequalities. This called for the abandonment of the stretch budgeting concept. Another reason that is attributed to the abandonment of the stretch budgeting concept was the budgeting plan process. The decision managers found it somewhat complex to disseminate information particularly to their middle managers. Nevertheless, the decision managers did not feel comfortable to pass financial information to the division manages for fear that the information could be leaked to potential competitors. As such this lack of such important information by the managers prompted them to call for the abandonment of this concept. Finally, most of the managers did not feel satisfied with this concept because of the delay that was associated with the payment of their bonuses. This is because the bonuses had to be reviewed over and over again through a system of officials. At the end of the day, the payments were delayed by as long as three or four months after the end of the quarter. These delays are what led to some managers advocating for the abandonment of this concept. CITATION Dav08 l 1033 (Young, 2008)The call for the abandonment of the stretch budgeting process was adhered to by the management of the HCC Industries. There therefore, arose the need to find an alternative to replace the stretch budgeting concept. The management came up with a new concept, The Minimum Performance Standards. This was in such a way that targets were set over and above the normal capabilities of the industries, that is, the targets were set with a 25 % to 30 % increase in the level of performance as opposed to the normal 5% to 10% increase. It is important to note that the probability of attaining these targets was 0.5. This means that the probability of success was equal to the probability of failure. Bonuses still existed in this new budgeting philosophy. Moreover, profit targets were still used as a major criterion to measure the level of performance among the six other criteria. CITATION Car11 l 1033 (Warren, 2011)The new budgeting philosophy had its own strengths. For instance, it curbed the problem of delays that was associated with the stretch budgeting concept. The bonuses were still paid annually but the delays were not experienced. Moreover, the voice of the division managers with regard to communication of financial information was now heard. In fact, the division mangers were given the mandate to make the decision of which of the subordinates would be in the bonus program. They were charged with the responsibility of the allocation of bonus. The problem of communication breakdown was therefore addressed and this was yet strength of this new budgeting philosophy. The Minimum Performance Standards were set in such a way that the targets were not as high as those of the stretch budgeting concept. Because of this, the targets were not as optimistic and thus reasonable. These targets were met by most of the industries thereby minimizing the problem of disparity and encouraging the success of the entire organization as well through achievement of targets. CITATION Nor10 l 1033 (Mackintosh, 2010)The Minimum Performance Standards were aimed at having a 100% probability of success upon inception. However, they showcased later a 50% probability of success. This means that the budgeting philosophy was coupled with a number of weaknesses regardless of its strengths. A major weakness is with regard to the mandate that was given to the division managers. They were given so much power when it came to handling finances and this created the fear of leakage to information to competitors. Moreover, since the division managers were given a greater financial voice, financial reports were subject to discrepancies due to manipulation. Finally, as much as the delays in the bonus pay were reduced, the bonuses themselves were reduced thereby reducing incentives and discouraging internal competition. CITATION Bha08 l 1033 (Debarshi, 2008)Evaluate the decision to use “minimum performance standard” (MPS) targets instead of “stretch” targets.
It is important to note that both the Minimum Performance Standards and the Stretch Performance Standards had their own strengths and weaknesses. Drawing the line between the two target strategies can be somewhat difficult since the line is too thin. However, the expectations of the Minimum Performance Standards were set too high. Consequently, the results of this target policy were not as expected by the management. The Minimum Performance Standards was associated with a lot of disparities. In some instances, the MPS budgeting policy was extremely successful. A good example was in the Hermetic Seal under the leadership of Mike. As a conservative manager, he believed in setting achievable targets after which he would set them higher and still achieve. According to this industrious manager, the stretch budgets were not there to make managers achieve what they could not but rather to lead them. He however preferred the MPS strategy since it was conservative and a better strategy to lead managers to achieve their targets better as opposed to the stretch budgets. CITATION Pau08 l 1033 (Collier, 2008)Unlike Mike, Carl Kalish, the manager of Glasseal, had a different ideology concerning this. He also believed in being realistic with his targets. However, he also postulated that even with realism, it is very possible not to achieve targets or to go beyond the set targets. Carl preferred the stretch budgets for two main reasons; the managers were given bonus payments even in the event that they did not realize or achieve their targets since the targets set were often too high. Besides, the rewards that were given for achieving the targets as incentives were way greater than what they received under the Minimum Performance Standards. In addition, the cooperate managers were not as dictatorial as they were in the MPS philosophy. Lou Palamara of Sealtron on the other hand also created a very comprehensive budget under the MPS policy. In his budget, he increased the returns by increasing the sales and reducing the cost of production through cutting down the costs of advertising. He also postulated the laying off of a few workers so as to realize the targets he had set. He strongly believed that the MPS policy was a good target strategy that would efficiently help him in realizing his targets as he forecast a high probability of success. On the other hand, Alan Wong of Hermetite was the most optimistic. He did not seem to believe in the Minimum Performance Standards policy. Being a manager of a division that had experienced great losses in the previous financial year, he projected high profits for this particular division. However, with the intervention of other managers, he had to downward revise his budget sharply. He nevertheless still believed that he had the potential of realizing his earlier set targets. From this analysis, or rather evaluation, it is quite clear that the new method of targeting and budgeting was quite successful. However, the fact that the Minimum Performance Standard also had it failures is not debatable. Perhaps the failure was due to the fact that it was a new policy being introduced, perhaps not. CITATION Chr11 l 1033 (Chapman, 2011)Should HCC managers have expected that the MPS target-setting philosophy would be equally effective in all four operating divisions described?
The four divisions in the HCC, that is Hermetite, Glasseal, Sealtron and the Hermetic Seal, displayed various levels of performance. As a matter of fact, they showcased inequalities upon the introduction of the new targeting policy, the Minimum Performance Standards philosophy. This is what led to huge disparity. It can thereby be said that the MPS philosophy of setting targets was not equally effective in all four operating divisions. This is clear from the analysis above. The divisions were led by differently abled managers and they also had other diversities. For this reason, they were not, at all costs, expected to be equal in terms of performance. Moreover, the new target setting philosophy was not supposed to be effective in all the four divisions, inequalities are inevitable. CITATION Dan12 l 1033 (Chandana, 2012)Moreover, the HCC managers should not have expected that the MPS target-setting strategy would be equally effective in all the four divisions due to their different levels of development and endowment. The more developed divisions were bound to adapt easily to the new strategy as opposed to the less developed ones. This is because the Minimum Performance Strategy was more stringent in terms of targets as compared to the stretch budgeting concept. Unlike the stretch budgeting concept, the MPS was based on more realism and as such, greater commitment as well. For this reason, the managers should not have expected the new policy to be equally effective in all the four divisions described.
The management of the four divisions is not the only reason as to why the HCC managers should not have expected that the MPS targeting philosophy to be equally effective in all the four operating divisions. The different level of optimism by the different managers was also a cause of alarm and an indication of inequality. It would be therefore unrealistic for the mangers to expect the divisions to react equally to the new method of target setting. For instance, the manager of Hermetite, Al Berger was greatly optimistic. He was so optimistic to the extent that he had to cut down his projected sales at the end of the day. This was not new to the HCC managers since Al Berger was very optimistic from day one, way from the inception of the old system of targeting, that is, the stretch budgeting concept. As such, it was expected that Al Berger would be still the same optimistic manager and his management policies and strategies as well as targets could not be compared to those of the other conservative managers. Besides, the divisions had displayed different reactions with the stretch budgeting policy. As such, they would also not have the same reaction with the new target- setting policy. The HCC managers should not have thereby expected that the Minimum Performance Standard setting policy would be equally effective in all the four divisions of operation. CITATION Kev11 l 1033 (Callahan, 2011)What, if anything, could have been done to improve the implementation of the new philosophy?
The implementation of the new philosophy cannot be said to be a success in one too many ways. It was not equally effective in the four divisions of operation. However, it is a good policy of targeting, better than the stretch budgeting concept. This part of the research paper seeks to critically analyze some of the ways through which the implementation of the new philosophy could be improved. The motivation should be made as clear and as comprehensive as possible. This would be very effective since it would ensure effective communication among the managers. The use of long term incentives could also be very important when it comes to improving the implementation of the new philosophy. The goals and targets that are set are the most important consideration with regard to the effectiveness of the target- setting policy that is adopted. The targets should be realistic. However, they should also be challenging as much as they are achievable. The importance of having a challenging but achievable goal can never be underestimated. This is because it increases the commitment of the manager towards the targets of the budget, it cuts down the cost of intervention by the management, it leads to the creation of an atmosphere of winning and finally it does not allow over-commitment of resources which may yield no results at the end of the day. This is because as much as the targets set are challenging, they are achievable within a limited number of resources. CITATION Ahm01 l 1033 (Belkauoi, 2001)Generally, there are six major tools that could be used to improve the effectiveness of the MPS budgeting strategy; rewards, coordination, controls, resources, planning and finally goals.
Regulations or rather controls need to be based on trends. Trends help the organization a great deal in telling the possible outcomes. As such, regulations should be put in place in order to achieve this. Interaction, on the other hand, gives room for communication. Communication of goals acts as a pathway to achieving of targets. The rewards need to be based on degrees of performance. Rewards are basically there to give incentives to the members. Under the stretch budgeting, rewards were merely given to those who tried to reach the set targets. This was slightly improved under the Minimum Performance Standards. However, for much better performance, the rewards are supposed to be given in relation to performance. The importance of planning can never be underestimated. Planning acts as a blueprint to the whole production process. It is a guideline to the realization of targets by keeping the process in check. Resource constraint could greatly affect the realization of set targets. Availability of resources enhances the achievement of targets through aiding the organization to reach its full potential. With the adoption of these adjustments, the HCC industries would be in a much better position to achieve set targets through the Minimum Performance Standards. CITATION Ral00 l 1033 (Adler, 2000)References
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