Management Control Systems: Performance Measurement, Evaluation and Incentives

Citation

Merchant, K. A., & Van der Stede, W. A. (2025). Management Control Systems: Performance Measurement, Evaluation and Incentives (5th ed.). Pearson Education Limited.

Chapter Summary

The fifth edition has 17 chapters in six sections. Pearson describes the book as a management accounting text built on the authors' framework of performance measures and controls, with a wide range of international examples from real companies and 75 case studies. Pearson also states that it can be read with or without a background in management. The sections move from the idea of control, through the available types of control, to financial results control, the problems of performance measurement, objectives beyond profit and finally governance and ethics.

Section I, Chapter 1: Management and Control

The single chapter of the opening section sets up the control function of management: what management control is and why organizations need it. It is the foundation for the framework used in the rest of the book.

Section II, Chapters 2–6: Management Control Alternatives and Their Effects

The framework itself. Chapter 2 treats Result Controls and Chapter 3 treats Action, Personnel and Cultural Controls, giving the four categories named in the book's framework. Chapters 4 and 5 look at the tightness of a control system and its costs. Chapter 6, Designing and Evaluating Management Control Systems, brings the pieces together as a design and assessment task.

Section III, Chapters 7–9: Financial Result Control Systems

Chapter 7 covers financial responsibility centers, Chapter 8 planning and budgeting, and Chapter 9 incentive systems. Together they cover how financial results are used to direct and reward managers.

Section IV, Chapters 10–12: Performance Measurement Issues and Their Effects

Chapter 10 looks at financial performance measures and their effects, Chapter 11 at remedies to the myopia problem, and Chapter 12 at using financial result controls in the presence of uncontrollable factors. These chapters deal with what goes wrong when results are measured and rewarded.

Section V, Chapters 13–14: Objectives Beyond Profit Maximization

Chapter 13 draws the control implications of the broader goal of stakeholder welfare maximization, and Chapter 14 covers management control in not-for-profit organizations.

Section VI, Chapters 15–17: Corporate Governance, Important Control-Related Roles, and Ethics

Corporate governance and boards of directors (Chapter 15), controllers and auditors (Chapter 16), and management control-related ethical issues (Chapter 17).

Key Concepts

Chapters 1–6: The Control Framework

• Result controls: controls that reward or penalize people according to outcomes.
• Action, personnel and cultural controls: the other categories in the framework, directing behaviour, selecting and training people, and shaping shared norms.
• Control tightness and cost: how closely a system constrains behaviour, and what that costs.

Chapters 7–9: Financial Result Controls

• Responsibility centers: units for which managers are held accountable for financial results.
• Budgeting: planning and budgeting as a control tool.
• Incentive systems: the link between performance and reward.

Chapters 10–12: Measurement Problems

• Myopia: the tendency of short-term measures to distort decisions, and the remedies for it.
• Uncontrollable factors: handling results influenced by events outside managers' control.

Chapters 13–17: Wider Settings

• Stakeholder welfare and not-for-profit control.
• Corporate governance and the roles of controllers and auditors.
• Ethical issues in control.

Critical Analysis

Strengths

• A single, named framework. Chapters 2–3 introduce result, action, personnel and cultural controls, and later chapters apply them, so the book reads as an argument rather than a catalogue of techniques.
• Attention to what measurement does to behaviour. Section IV is devoted to the effects of financial performance measures, myopia and uncontrollable factors.
• Case material. Pearson cites 75 case studies and international company examples.
• Wide organizational scope. Not-for-profit organizations, stakeholder objectives, governance and ethics are given their own chapters.

Limitations

• Not a technique text. The contents contain no chapters on product costing, cost-volume analysis or capital budgeting techniques; the book assumes readers have those from elsewhere.
• Selective treatment of non-financial controls. Result controls and financial measures take a large share of the chapters (Sections III and IV), while action, personnel and cultural controls share a single chapter.
• Scale. Seventeen chapters and 75 cases are more than a single course normally uses, so a syllabus has to select; the six-section structure makes it possible to drop whole sections such as Section V or VI.

Where It Fits in the Course

In the management accounting list this is the book to choose for the control and incentives half of the subject. The OpenStax Principles of Accounting, Volume 2 and Seal, Rohde and colleagues' Management Accounting are introductory books that teach cost concepts, budgeting and decision techniques. Drury and Tayles's Management and Cost Accounting and Datar and Rajan's Horngren's Cost Accounting cover product costing, decision-making, budgeting and performance evaluation in more depth. Read one of these first, so that budgets, responsibility centers and variances are familiar; Merchant and Van der Stede then ask how those tools affect behaviour and how to design a system around them.

Atrill and colleagues' Management Accounting for Decision Makers is the other book on the list that approaches the subject from the decision-maker's side, and can be used as a companion for the budgeting material that Section III treats from a control perspective.

How to Use This Book

The book suits MBA and master's students and advanced undergraduates who have finished a first course in management or cost accounting.

• Core: Chapter 1 and Section II (Chapters 2–6) give the framework; read them in order.
• Financial controls: Chapters 7–9 and 10–12 form the long middle of the book; read them together, since Section IV examines the problems of Section III.
• Broader settings: Chapters 13–14 for non-profit and stakeholder contexts, and Chapters 15–17 for governance and ethics, can be selected according to course emphasis.
• Cases: with 75 case studies on offer, pick a few per section and discuss them against the framework of Chapters 2–3; reading a case before the chapter it illustrates is a useful way to see what the framework is for.