John W. Montgomery, a member of the budget committee of the New Jersey Insurance Company, reviewed the Law division’s budget performance for the first half of 1987. The report showed an over budget and under budget performance for Individual Loans Section and Corporate Loans Section, respectively. Diﬀerent control mechanisms were recommended to each division to minimize the variances in its budget. These mechanisms were based on the nature of the expense center, whether it is an engineered expense center or a discretionary expense center.
The law Division of New Jersey Insurance Company has five divisions, which include the Individual Loan Section and the Corporate Loan Section. Examiners in the Individual Loan Section were carefully selected and trained to check and approve certain of the loan transactions. Because the work they performed were repetitive, management set a work standard of 15 loan transactions per examiner per day as controlling measure. The individual Loan Section maintained a level work force as company policy and to ensure that anyone who would be trained for the job was needed permanently in the section. To achieve control over the section and still comply with the company policy, the examiners occasionally got some work from the investment division, did some aspects of foreclosures, or worked overtime.
The lawyers in the Corporate Loan Section, on the other hand, handled complex corporate loans which necessitated the opinion of outside counsels. Expenses incurred in employing outside counsels were paid by the borrowers and did not aﬀect the budget of the corporate loan section. As a control procedure, the section head conducted consultations with the section lawyers and reassigned work of various attorneys to equalize their work loads. Weekly staﬀ conferences with Mr. Carlisle were also conducted and submission of Work Assignment Report was made.
However, since corporate loan transactions took varying amounts of time to complete, the lawyers could not submit it on a daily or weekly basis and just submitted the report when their work situation suggested to them a new one was desirable. The amount of time that a lawyer had to spend on a particular job was unpredictable and the unusually heavy work loads were met not only by overtime but by passing them to outside counsels.
New Jersey has to identify means on how to minimize over budget variances in the Individual Loan Section and identify the control mechanisms that should be implemented to keep track of the performance of the lawyers in the Corporate Loan Section.
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Framework for Analysis
The current control mechanisms in the Individual Loan and Corporate Loan Sections will be evaluated if they are eﬀective measures of cost control and output control. Factors that caused the variances in the budget of each section will also be identified and analyzed.
The work standard of 15 loan transactions per examiner per day in the individual Loan Section sets a target for each examiner that they must comply with since their performance will be evaluated based on their ability to meet this objective. As such, the budget of the section will emanate from this activity level, review of which becomes easier since factors for the variances are measurable. However, the standard of 15 loan transactions must not be regarded as a rule of thumb when it comes to performance evaluation since individual loans still vary from one another.
In addition, a good evaluation of the job at hand is also important. Batches of loan transactions diﬀer in terms of the eﬀort required to process them. This makes it diﬃcult to discern if the standard should be applied or not. In this instance, the skilled judgment of a supervisor would be necessary to determine if adjustments have to be made.
For the Corporate Loan Section, consultation of the company lawyers with Mr. Carlisle at the initiation of each transaction becomes crucial since Mr. Carlisle will be able to determine if a lawyer can immediately act on a particular transaction and whether work reassignment is necessary. Weekly staﬀ conferences provide a vehicle for Mr. Carlisle to know the details of what was going on with the work of each lawyer and the entire section. The work assignment report allows Mr. Carlisle to know the work status of each lawyer on a periodic basis which enables him to identify who can be available for more work. Overall, these control measures also act as information tools on whether the services of outside counsels are already needed.
The individual loan section which is an engineered expense center should have minimal variances in its budget. Variances in the full time salary may be caused by increases in the salary of the examiners. The small budget for overtime caused the large variance of $29,110, which, may be due to the fact that the section is hesitant to hire more employees because of the cost associated to training new hires. Other costs such as telephone and printed forms were just additional costs incurred that stemmed from the additional hours employees spend at work to finish the required number of transactions in a day. On the other hand, for the corporate loan section, the diﬀerence in the budgeted number of full-time employees from the actual may one of the factors that caused the under budget on the salaries.
Individual Loan Section
An eﬀective control mechanism for the Individual Loan Section would be one that apportions the work load correctly among the examiners.
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make sure that work is allocated wisely with the number of standards set as targets. To come up with a more accurate budget for overtime, historical data should be analyzed and projected to the following year according to the foreseen conditions. Penalty and rewards scheme can be devised to improve performance. Backlog of transactions should be reflected the employee’s performance.
Corporate Loan Section
For this division the following should be implemented.
a. Classify and evaluate loans according to the nature, size, and credit history. Specify timeframe of estimated completion of loan processing according to each classification. Come up with quality measures that would benchmark and compare types of loans.
b. Come-up with standard work assignment report to be passed on a regular basis to keep track of each lawyer’s accomplishments that will serve as a monitoring report. c. Guidelines should be established to serve as a basis as to when to seek outside counsel.
d. Match salaries to the performance of each lawyer, which are reflected in the performance reports.
The recommendations above will help improve the existing control mechanisms of New Jersey Insurance Company on both the Individual and Corporate Loan Divisions. The variances would be minimized when these measures are implemented.
For the individual load section, John Wallace should re-evaluate the number of transactions each examiner can process and assign it as a standard which will be the basis of performance of each member in the division. Whereas, for the corporate loan section, Peter Carlisle should standardize the reporting system, come-up with a reporting template and set a deadline, weekly or bi-monthly, to properly monitor each lawyers’ eﬃciency.