MGMT 122 Lecture Notes - Lecture 13: Formal System, Net Present Value, Weighted Arithmetic Mean
Document Summary
All decisions will be about maximizing their own utility not about maximizing the utility for the company. Want to control their activities to do what you want even though you cant directly observe them all the time. Goals have to measurable so there has to be some way of evaluating them. Large organizations cannot be directly overseen by a single person. People are inherently selfish, so if not directly controlled, they will maximize their utility, not the organization"s objectives. To combat this, firms establish numerous responsibility centers. Someone is put in charge of each center and held responsible for its achievements. Each responsibility center is controlled by top management through incentivization, not direct command. When you tell someone what they are going to be evaluated on, that is what they will work to maximize and do nothing else- so it is very important to pick the right incentives. The manager of the division is evaluated on certain accounting metrics.
