The Effect of Management Control Elements on Coordination

This study examines how control elements of a firm affect managerial decision making. The firm operates a network of 59 profit centers. It uses a transfer-pricing system designed to deal with externalities individual profit centers can impose on other profit centers. Further, profit center managers are incentivized with own-level residual income measures. The use of the latter measure would lead managers to make decisions benefiting their performance irrespective of whether these decisions negatively affect other profit centers. However, the firm implemented a third system that would potentially lead managers to benefit other profit centers. The firm established regional clusters of profit centers that meet at least once every quarter. The creation of these clusters creates proximity as profit centers perform complementary activities, making it more beneficial for them to coordinate. Our findings suggest that self-centered choices by profit centers are mitigated as proximity within a cluster increases. Additionally, we find evidence that proximity is positively associated with coordination and overall performance