UNIVERSITY OF CALIFORNIA, DAVIS
GRADUATE SCHOOL OF MANAGEMENT
MGP 271: Incentives and Control
Instructor:
Suneel Udpa, udpa@earthlink.net
Class Sessions:
Working Professionals: Mondays 6-9pm (OCM)
Office Hours:
Mondays at OCM before or after class and by appointment (please
e-mail)
Required Readings:
Handouts and Reader (Check www.study.net for the cases)
Recommended Texts:
Managerial Economics and Organizational Architecture by
Brickley, Smith and Zimmerman
Accounting for Decision Making and Control by Zimmerman
EVA and Value-based Management by Young and O’Byrne
Advanced Management Accounting by Kaplan and Atkinson
Management Control Systems by Merchant and Van der Stede
Management Control Systems by Anthony and Govindrajan
The Balanced Scorecard by Kaplan and Norton
Performance Measurement and Control Systems by Simmons
The Complete Guide to Executive Compensation by Ellig
Auditing and Assurance Services by Messier
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Course Overview and Objective:
This course examines the incentive structures and control mechanisms necessary to ensure that
an organization’s strategies are implemented. Topics include organizational structure,
responsibility accounting, performance metrics, compensation plans, incentive contracts, internal
corporate governance, and internal controls. These issues are of vital importance in a
decentralized organization. Recent scandals at WorldCom, Global Crossing, Adelphia, Enron etc
illustrate the importance of effective incentive contracts and appropriate control mechanisms.
We will examine all of these issues with simple economic and organizational tools of analysis as
well as “real world” research on how organizations govern themselves. These issues are relevant
to all managers whether they work in for-profit firms or non-profit and governmental
organizations.
Course Structure:
Class sessions are designed to highlight key concepts, clarify areas of difficulty, and provide a
general framework to address the subject matter. Class notes that summarize the topics/subtopics
to be covered in class will be distributed the previous week. The class notes will provide you an
outline of the material to be covered in class.
Although I have provided a list of recommended texts, there is no required text for the class.
There are two reasons. One, a single text that adequately covers all of the material in the course
is not available. The second reason is intentional – I do not want you to rely on a text as your
sole source of information and solutions to managerial problems. You will realize as the course
progresses that, most, if not all, of the solutions/appropriate effective responses to managerial
issues will come from your own professional experience, by reflecting on the “theory” presented
in class, by raising questions and reflecting on the responses provided, and by adapting what you
learnt to new situations and problems.
The focus of this course is on “actual implementation.” For instance, the solution to a particular
problem is not simply to choose appropriate metrics to measure operational efficiency, but to
actually choose and define 2-3 performance metrics that best measures operational efficiency
and that is best suited to the firm. For the cases and the project, you can take the perspective of a
consultant or a manager within the firm. For a case study, it is important that you make it “real”
for yourself by “getting inside” the case situation. I want you to feel and understand the difficult
trade-offs, lack of relevant data, competitive pressures and political realities of the situation.
You should not expect closure after each class in the form of a “correct” answer to a case or a
management problem. Instead, as the course progresses you will gain insights into how
organizations implement strategy using incentive contracts and control mechanisms and the
difficult trade-offs they face.
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Grading:
Class Participation/Attendance/Classroom Etiquette
Cases/Homeworks
Final Exam (Comprehensive)
(open book/open notes)
20%
50%
30%
Case Assignments and Class Participation:
Please form groups of three by the end of the first class. You will submit Case Assignments
listed in the syllabus in groups. Mini Cases that are listed in the syllabus as CW are to be
submitted individually, but I strongly encourage you to work in groups for these as well.
I expect active class participation. Class preparation and participation are the keys to getting the
most from the class. Voluntary class participation is strongly encouraged. However, I will call on
specific class members to answer specific questions from CW problems and cases. You will
know before class the groups I will call on for a specific case or CW. You may want to prepare a
slide or two as part of a response to a question. As noted later, 20% of the course grade is
allocated to class participation.
I recognize that occasionally you may have to miss a class/come late to class because of work or
for personal reasons. Of course, I would like you to keep that to a minimum. However, if you
are going to be missing a class, please let me know in advance by email. An absence from
class without an email notification will negatively affect your grade. Also, you need to come
to class on time. Again, coming late to class without email notification will negatively affect
your grade. Please use your name cards.
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Course Outline
Week 1
(Mon, Oct 2)
Introduction
Need for Effective Incentive Contracts and Internal Controls
Designing a Basic Management Control System
Designing a Basic Incentive-based Compensation System
Designing a Basic Internal Control System
Models of Behavior
Week 2
(Mon, Oct 9)
Organizational Architecture
Factors that determine the Organization Structure of the Firm
Centralization vs Decentralization
Basic forms of Organization Structure
Case: Philips vs. Matsushita: A New Century, a New Round (due
Monday, Oct 9)
Week 3
(Mon, Oct 16)
Management Control Environment
Behavior in Organizations
Principal-Agent Problems
Responsibility Centers
Transfer Pricing
Case: Rotch Interactive Case (no write-ups due; prepare case for
Mon, Oct 16 with double)**
**Will be distributed in class on Mon, Oct 9
Week 4
(Mon, Oct 23)
Performance Measurement – The Balanced Scorecard
Introduction to the Balanced Scorecard (BSC)
Using the BSC as a Strategic Management System
Implementing the BSC
Analyzing Financial Performance – Alternatives
5
Weeks 5
(Mon, Oct 30)
Performance Measurement – The Balanced Scorecard (contd.)
Case: Boston Lyric Opera (due Mon, Oct 30)
Value-based Management
Shareholder vs Stakeholder view
Understanding EVA
The EVA Financial Management System
Week 6
(Mon, Nov 6)
Value-Based Management (contd.)
The EVA Financial Management System (contd.)
Valuation Concepts
Acquisition Pricing and Planning
Management Compensation and Incentive Contracts
Basics of Incentives Contracts
Base Compensation
Rewards-based Pay
Incentives for Sales Personnel
Week 7
(Mon, Nov 13)
Management Compensation and Incentive Contracts
Making Managers into Owners
Characteristics of Incentive Compensation Plans
Incentives for Corporate Officers
Incentives for Business Unit Managers
Management Compensation using EVA
Week 8
(Mon, Nov 20)
Case: Akamai’s Underwater Options (A) (due Mon, Nov 20)
Case: Vyaderm Pharmaceuticals (due Monday, Nov 20)
Week 9
(Mon, Nov 27)
Implementing Internal Corporate Governance and Internal
Controls
Implementing Internal Corporate Governance
Effective Management Controls
Internal Controls
Example: Examining the Internal Controls for the Revenue
Recognition Process
6
Week 10
(Mon, Dec 4)
Implementing Internal Corporate Governance and Internal
Controls (contd.)
Compliance with Section 404 of the Sarbanes-Oxley Act of
2002
Organizational Change and Review of the Quarter
Week 11
(Mon, Dec 11)
FINAL EXAM