1. The Potential Downside
While rewards can be powerful tools to get employees to work for the benefit of the firm,
they can also have some negative outcomes. First, if the incentive criteria seem out of the control
of workers (e.g., stock incentives for lower level employees) or the goals unreachable, they can
Discussion Question 17: What is it about reward systems and incentives that make them
an emotional flashpoint within organizational control systems?
Discussion Question 18: What are some examples of companies that have effectively
aligned their reward systems with their goals and culture?
The SUPPLEMENT below discusses how Office Depot’s President found that the firm
needed to change its incentive systems to provide for a better customer experience.
Extra Example: Office Depot Sees the Error in its Reward System
It is important to incent workers to focus on the right items. Office Depot’s President discovered this when he used
customer feedback, sales data, and his own experience as a “mystery shopper” to develop new metrics for his store
employees. In 2010, Kevin Peters was trying to get to the bottom of some puzzling statistics. Office Depot’s sales
were down, while its customer satisfaction scores were up dramatically. So, he set out as a “mystery shopper” and
visited 70 stores in 15 states, acting as a regular shopper to see why Office Depot’s customers weren’t buying, even
though they said they were happy with the store.
What he found was that their employees did well at working to achieve good scores on the goals the company set
out for them (and the items they asked their customers about), but they were incenting and measuring the wrong
items. They rewarded store managers and workers for having clean floors, windows, and bathrooms as well as fully
stocked shelves. They did well on these items in customer satisfaction surveys, but this isn’t what got customers to
buy. Customers wanted the products they needed to be easy to find, support from sales staff to find and select the
right items, easy in and out experiences, and services to help them put their purchases to work, such as software
installation help and computer repairs. In short, Office Depot was rewarding the wrong things. They worked to keep
the store clean and organized but didn’t incent workers to build and maintain customer relationships.
Source: Peters, K.. 2011.Office Depot’s president on how “mystery shopping” helped spark a turnaround. Harvard
Business Review. 89(11): 47–49.
Discussion Question 19: What are some examples of firms that appear to reward their
employees for the wrong things?
Discussion Question 20: Have you shopped at Office Depot lately? Does it appear
workers are focusing on providing the right kind of service experience?
2. Creating Effective Reward and Incentive Programs
Another challenge for strategic managers is to create reward and incentive programs that
EXHIBIT 9.4 presents the qualities and characteristics of a good reward system:
1. Objectives are clear, well understood, and broadly accepted.
2. Rewards are clearly linked to performance and desired behaviors.
3. Performance measures are clear and highly visible.
The SUPPLEMENT below addresses what can go wrong when a reward system is
Extra Example: Nordstrom Gets Sued for Reward System Violations
One way to motivate strong performance is to empower employees to take initiative in responding to customers’
needs. Whether managers realize it or not, however, there are built-in dangers when empowered employees are held
accountable for performance goals—especially for difficult ones—and then left to their own devices to achieve
them.
Take, for example, Nordstrom, the upscale fashion retailer known for extraordinary customer service. It found itself
embroiled in a series of lawsuits related to its sales-per-hour performance measurement system. Used to track the
performance of its entrepreneurial salespeople, the system was designed to support the service orientation for which
Nordstrom is famous. But without counterbalancing controls, the system created the potential for both exemplary
customer service and abuse. Some employees claimed that first-line supervisors were pressuring them to under-
report hours on the job in an attempt to boost sales per hour. Settling those claims cost Nordstrom more than $15
million.
Source: Simons, R. 1995. Control in an age of empowerment. Harvard Business Review, 73(2): 80–88.
Discussion Question 21: What kind of “counterbalancing” incentives could Nordstrom
use to create a reward system that would not be abused?
Discussion Question 22: Do some professions or types of work lend themselves to abuses
of their rewards and incentive systems more than others? Which ones? Why?
Emphasize that there needs to be a close link between reward systems and an
organization’s culture. A culture of risk taking may be present in firms that are entrepreneurial,
We also note that incentive and reward systems don’t have to just be about money. We
The INSIGHTS FROM RESEARCH for this chapter provides further evidence that
C. Setting Boundaries and Constraints
This section discusses how rules and regulations, as well as aspiration levels and goals, can
provide effective forms of organizational control. Point out that culture and reward systems often
need to be supplemented or reinforced by boundaries and constraints. Used properly they can:
1. Focus individual efforts on organizational priorities.
2. Provide short-term objectives and action plans that channel efforts.
Emphasize that boundaries and constraints must be used sparingly in order to be
The SUPPLEMENT below illustrates a rather humorous example of regulations being
enforced in an excessive fashion in the midst of public emergency.
Extra Example: Firefighting Water Trucks Forced to Dump Water
State officials near Coeur d’Alene Idaho issued $100 citations recently to two drivers whose U.S. government water
trucks were on their way to fight forest fires in Montana. The officials discovered that the trucks exceeded the
highway weight limit of 17 tons (by 1 and 2 tons respectively). According to the Helena (Montana) Independent
Record newspaper, the trucks were permitted to head out to the front lines only after they had dumped enough water
to satisfy the inspectors.
Source: Shepherd, C. 2000. Water weight. Lexington Herald-Leader, October 27: 29.
Discussion Question 23: Do you think the inspectors acted properly or excessively?
Discussion Question 24: Have you ever been asked to observe a rule that was excessive?
What is an example from your own experience?
Discussion Question 25: What effect does an excessive rule or an overly strict regulation
have on your behavior? How do you think such rules and regulations affect
organizational performance?
1. Focusing Efforts on Strategic Priorities
It is important that firms focus their attention on a limited number of shared priorities.
Vision, mission, and strategic objectives are a type of boundary that was introduced in Chapter 1.
Management can also take a role in clarifying the boundaries of the firm’s priorities. As
an example, we discuss how Steve Jobs would have his executive team work to identify the 10
Discussion Question 26: Can you think of firms that have significantly changed their
strategic priorities in the last several years? Why did they make this change?
Discussion Question 27: What kind of actions can managers take to highlight the
priorities and boundaries for the firm?
2. Providing Short-Term Objectives and Action Plans
Strategic objectives and actions plans may have a more direct impact on the behavior of
an organization’s employees. Discuss the attributes of short-term objectives that need to be
present for them to be effective. They must:
1. Be specific and measurable.
3. Be achievable yet challenging enough to motivate managers who must strive to
Short-term objectives must provide proper direction but also be flexible enough to keep
Discussion Question 28: What are some examples of short-term goals that you have
been faced with as a student? In your place of work? Did you find that those goals had a
positive influence on your behavior?
Action plans are another type of boundary or constraint because they provide specific,
measurable frameworks for how a strategy is to be implemented. Once managers understand the
STRATEGY SPOTLIGHT 9.3 describes how Marks and Spencer, a British-based retailer
translated its sustainability mission into clear, measurable targets.
3.
Impro
ving
Opera
tional
Efficie
ncy
and
Effecti
veness
Discuss why rules-based controls are most appropriate in organizations where:
1. Environments are stable and predictable.
2. Employees are largely unskilled and interchangeable.
4. The risk of malfeasance is extremely high (as in banking or casino operations),
McDonald’s, the Ritz Carlton, and CA Technologies are used as examples.
4. Minimizing Improper and Unethical Conduct
Rules and guidelines are often used to control commercial practices such as bribes,
kickbacks, and other forms of payment that may be illegal. These guidelines are used in many
D. Behavioral Control in Organizations: Situational Factors
In this section, we take a contingency approach to behavioral control. That is, the
To summarize, we suggest that culture is most associated with professional organizations,
where high autonomy and norms are the basis for behavior; rules/boundaries are best where there
STRATEGY SPOTLIGHT 9.4 highlights how an upstart firm is using data analytics to
strengthen control in major financial firms.
EXHIBIT 9.5 provides a summary of alternative approaches to behavioral control. Ask:
Discussion Question 29: Are you familiar with organizations that effectively (or
ineffectively) matched their elements of behavioral control with their particular situation
(internal and external factors)?
E. Evolving from Boundaries to Rewards and Culture
In general, the use of culture and reward systems provides a more favorable
“internalized” control system than a set of rules and regulations. Often, however, companies have
to develop in this direction. We provide four guidelines:
1. Hire the right people, those who identify with the company’s dominant values.
2. Use training and indoctrination to build a strong identity and sense of the
4. Align company reward systems with organizational goals and objectives.
III. The Role of Corporate Governance
In this section, we focus on the need for both shareholders (the owners of the corporation)
As noted by Robert Monks and Nell Minow, two of the leading scholars in corporate
governance, the primary participants in corporate governance are: (1) the shareholders, (2) the
This is certainly a topic that should create a lot of student interest. You may want to pose
some “lead-off questions” such as:
Discussion Question 30: What are some of the most notable examples of flawed
corporate governance? What do you feel were the causes? How could they have been
avoided?
A. The Modern Corporation: The Separation of Owners (Shareholders)
and Management
Here, we address some of the implications for the separation of ownership and
management in the modern corporation. We begin with some definitions of the corporation,
We briefly draw on the classic work of Adolf Berle and Gardiner C. Means who over
eighty years ago advanced the idea of the divergence of the interests of the owners of the firm
(shareholders) and its managers. Such separation is central to agency theory, which addresses the
when the goals of the principals conflict, and,
when it is difficult or expensive for the principal to verify what the agent is actually
Discussion Question 31: In general, do you believe there are fewer or minimal
governance problems in organizations where there is no separation of ownership and
management, such as small businesses or family firms? Why or Why not?
We also address two instances of conflicts of interests (Wynn Resorts and Apollo) by
B. Governance Mechanisms: Aligning the Interests of Owners and Managers
Three key governance mechanisms are addressed in this section. The first two address the
primary means by which the behavior of managers can be monitored: (1) a committed and
1. A Committed and Involved Board of Directors
In effect, the board of directors is the “middlemen” or “middlewomen” who provide a
balance between a small group of key managers in the firm and a vast group of shareholders. In
We provide three duties of the board of directors, according to the Business Roundtable.
These include such issues as the selecting, evaluation, and replacement (if necessary) of the
Discussion Question 32: At what point should firms prepare for CEO succession? As the
CEOs get older, or as soon as they are instated?
Discussion Question 33: Why do companies need to prepare for a CEO transition?
Given that most VPs are familiar with the company’s operations, and could quickly take
over, is extra preparation necessary?
A key element of effective boards is director influence, i.e., that board members are free
of all ties to the CEO or the company. The majority of large firms now have only one or two
For truly effective governance, firms need to move beyond just setting up an independent
board. They need to build an engaged and committed board. We discuss several prescriptions to
build an engaged, knowledgeable, and committed board, including:
Building the right expertise on the board to meet the strategic challenges of the
Keeping the board to a manageable size
Choosing directors who can participate fully and aren’t overly burdened by other
Balancing the board’s focus on the past, present, and the future
Considering management talent development below the CEO level
STRATEGY SPOTLIGHT 9.5 extends our discussion of the growing role of boards of
directors as strategic advisors to firm management.
Financial crises and corporate scandals have led to regulations and new guidelines on the
structure of boards. Institutional investors, such as CalPERS, have also pushed for better
The SUPPLEMENT below cautions that having outside directors in not a panacea for
Extra Example: Recycled Board Members
One reason that outside board members may not lead to effective governance is that firms fail to attract strong
outside board members. Boards primarily provide value by giving advice and counsel to the firm’s top managers and
by monitoring the strategic direction of the firm and the actions of top managers. However, individuals in the
“corporate elite” appear to get invited to serve on boards even if their own track record as a corporate manager or
board member is spotty or downright unsuccessful. For example, Ellen Futter headed the audit committee for the
board of for Bristol-Meyers when the firm had an accounting scandal in 1999 and served as a board member for AIG
Corporation when it failed in 2008 and required a nearly $200 billion bailout from the U.S. government. Still, she
has plum seats on the boards of JPMorgan Chase and Consolidated Edison. Similarly, Frederic Salerno, who served
on Bear Stearns’ board when the firm collapsed, serves on five boards including CBS and Viacom.
The recycling of these tainted directors can create two problems. First, these directors are likely appointed to new
boards because they are part of the “club” and not necessarily the best candidates who can provide the optimal
advice and counsel to the managers of the firm. As Sydney Finkelstein, a professor at Dartmouth’s Tuck School of
Business states, “There is a comfort level issue here.” These “tainted” board members are appointed to new boards
because CEOs are comfortable with them, not because they are the best candidates. Second, they may not be the best
monitors because they feel a strong loyalty to CEOs who nominate them to the board even though they are tainted.
Professor Finkelstein puts it this way. “Directors may be more concerned about friendships and connections” than
about diligent oversight of the firm.
Source: Olson, E. 2011. CEO careers: A case of rinse and repeat? cnnmoney.com. September 16: np.
Discussion Question 34: When should the directors of failed firms get another chance on
a new board?
Discussion Question 35: How can firms broaden the pool of potential directors to make
sure they end up with the best board?
2. Shareholder Activism
Although, as a practical matter, individual shareholders hold relatively little influence,
they do—acting collectively—have power to bring about shareholder action suits and demand
that key issues be brought up for proxy votes at annual board meetings. In addition, shareholder
Some institutional shareholders are being very proactive in demanding changes. We
discuss how CalPERS (the California Public Employees Retirement System) reviews firms’
performance patters and market conditions and works firms they are concerned about to improve
Discussion Question 36. Why should firms care about CalPERS’ concerns and
complaints?
Discussion Question 37. What other organizations might have a similar effect as
external control governance mechanisms? Would their role in influencing the companies
they oversee be proportional to the size of their investments? What might change this
influence?
The SUPPLEMENT below discusses the value activist investors can bring to
other shareholders.
Extra Example: The Value of Activist Shareholders
Some commentators have worried that activist shareholders are only out to enrich themselves, but evidence from a
study undertaken by Bloomberg indicates that the involvement of activist investors benefits other investors. Stocks
of companies that were targeted by activist investors between 2009 and 2013 rose in value by an average of 48
percent, beating the average rise of S&P 500 firms by 17 percent. Looking at longer-term trends, research by
professors from Harvard Law School and Duke Fuqua School of Business found that firms targeted by activist
investors showed improved market and accounting performance in the five years following activist investors’
interventions.
The conclusion is that other stockholders should not fear the activists. Instead, they should appreciate the potential
for value gains. Activist investors generate gains by taking stakes in firms they see as undervalued and pushing for
changes, including reorganizing and replacing management, restructuring the firm, selling units of the corporation,
pushing for stock buybacks, and increasing dividend payouts.
Source: Lachapelle, T & Jenks, G. 2014. Predators Are Good for Stocks. bloomberg.com. April 3: np.
STRATEGY SPOTLIGHT 9.6 discusses how institutional investors are now pushing
social initiatives in addition to pressuring firms to create more shareholder wealth.