Measuring division performance at ITT with accounting numbers (based on interviews with ITT executives). ITT is a conglomerate with divisions in a wide variety of businesses. Historically, top management of ITT has considered annual earnings growth to be a primary measure of corporate performance. Divisional performance measures provide strong incentives for division managers to achieve annual budgeted profit amounts.
Because achieving profit targets is important to division managers, one would expect division managers to have incentives to play games with the ‘‘scorekeeping'' system from time to time. For example, divisions may be expected to write off as many expenses as possible in years when they can easily achieve the profit target. Division managers have little control over the internal financial reporting system, however. The corporate controller's office specifies methods of accounting for transactions within the division, so division operating managers have little opportunity to make accounting choices that would put their performance in its most favorable light.
How do companies with this type of incentive plan keep division managers from playing games with the accounting numbers?