Performance Measurement Management Compensation Chapters 10 11 Management

Performance Measurement & Management Compensation Chapters 10 & 11, Management Control Systems, 12 th Ed. , Anthony and Govindarajan

Performance Measurement n n n Purpose is to implement strategy Should look at both short- and long-term Must measure critical success factors n n n Current Future Used to motivate and reward people

The Balanced Scorecard n Simply put, it’s a performance measurement system n n Provides goals Provides measurement metrics It must be based on strategy Should stress what’s important for the organization

The Balanced Scorecard n Basic example deals with 4 perspectives n n n Financial (external) Customer Internal business (processes) Innovation & Learning Can be expanded to encompass other areas

Implementation n n What’s the organizational strategy? What’s the specific goal? n n How is it to be measured? n n n Must be measurable Must provide for quantification Does it integrate measures into the evaluation system? Are the results reviewed frequently?

What to Avoid n n n Emphasis on short-term financial measures Attempts to link nonfinancial measures with financial results Excessive goals and measurements Outdated targets (goals) Failure to use interactive control n Don’t try to integrate into Balanced Scorecard

Management Compensation n n Should seek goal congruence Should provide positive incentives Should be focused on a “team effort” Should require conformance to standard procedures

Compensation Plans n Normally consists of n n Salary (contract driven) Benefits (contract driven) Incentives (performance driven) Usually divided into n n Short-term Long-term

Short-Term Incentive Plans n n Normally based on performance in a given year Examples include n Bonus pools, carryovers, and deferred compensation

Long-Term Incentive Plans n n Normally based on the company’s performance over a period greater than one year Examples include n Stock options, phantom shares, stock appreciation rights, performance shares, and performance units

Types of Incentives n Financial n n Money Benefits Perquisites Nonfinancial n n n Promotion Autonomy Recognition

Performance Criteria n n n Reasonable and understandable Adjustable, as needed Orient on both n n n Short-term performance Long-term performance Measurable against planned

Agency Theory n n n Decision-making authority delegated by owners to service providers Owners expect service providers to act in owners best interest Owners and service providers do not have same objectives n n Each party will act in own best interest Each party will have different risk tolerances