UNIVERSITY OF CALIFORNIA, DAVIS GRADUATE SCHOOL OF MANAGEMENT

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1 UNIVERSITY OF CALIFORNIA, DAVIS GRADUATE SCHOOL OF MANAGEMENT MGP 271: Incentives and Control Instructor: Class Sessions: Office Hours: Required Readings: Recommended Texts: Suneel Udpa, Working Professionals: Mondays 6-9pm (OCM) Mondays at OCM before or after class and by appointment (please ) Handouts and Reader (Check for the cases) 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

2 2 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.

3 3 Grading: Class Participation/Attendance/Classroom Etiquette 20% Cases/Homeworks 50% Final Exam (Comprehensive) 30% (open book/open notes) 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 . An absence from class without an notification will negatively affect your grade. Also, you need to come to class on time. Again, coming late to class without notification will negatively affect your grade. Please use your name cards.

4 4 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 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 Case: Akamai s Underwater Options (A) (due Mon, Nov 20) (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 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