Chapter 14 Performance Measurement, Balanced Scorecards, and Performance Rewards Cost Accounting Foundations and Evolutions Kinney and Raiborn Seventh Edition COPYRIGHT © 2009 South-Western, a part of Cengage Learning. South-Western is a trademark used herein under license.

Learning Objectives (1 of 3) Explain the importance of the mission statement Describe the role of performance measures in organizations Identify the guidelines that apply to the design of performance measures Calculate and use common short-term financial performance measures

Learning Objectives (2 of 3) Explain why management should focus on long-run performance Describe factors to consider when selecting nonfinancial performance measures Clarify why it is necessary to use multiple performance measures Explain how a balanced scorecard is used to measure performance

Learning Objectives (3 of 3) Define compensation strategy and explain the factors to be considered in designing the compensation plan Describe the difficulties in measuring the performance of multinational firms

Mission Statement Expresses the organization’s purposes Identifies how the organization will meets its customers’ needs through products or services Communicates organizational purpose and intentions to external parties and to employees Provides a basis for setting organizational strategy

Values Statements Reflects the organization’s culture Identifies fundamental beliefs about what is important to the organization

Use Performance Measures to Implement strategies that apply resources to activities Gauge the effective and efficient use of organizational resources Provide proof of a firm’s competitive advantages Enhance organizational communication Motivate managers Implement organizational control over activities Evaluate comparative managerial performance

Designing a Performance Measurement System 1.Assess progress toward goals and objectives 2.Awareness of and participation in developing measures 3.Appropriate skills, equipment, information, and authority to achieve goals and objectives 4.Timely and useful feedback 5.Able to adapt to changing environment

Short-Term Financial Performance Measures Divisional profits Achievement of budget objectives Variances from budget or standard Cash flow - Statement of Cash Flows shows –sources and uses of cash –quality of earnings

Evaluating Responsibility Centers Cost Center –Variances from budgeted costs Revenue Center –Compare budget to actual revenue Profit and Investment Centers –Revenue and expense variances –Net cash flow –Return on investment –Residual income –Economic value added

Short-run vs. Long-term Objectives Short-run Objectives Effective and efficient management of –Operating activities –Financing activities –Investing activities Long-term Objectives Investments in resources Enhance competitive position through customer satisfaction

Nonfinancial Measurements Can be clearly articulated and defined Are relevant to the objective Can trace responsibility Rely on valid data Have set objectives Have established internal and/or external benchmarks

Multiple Performance Measures Cost of quality –Prevention –Appraisal –Internal failure –External failure Lead time – how quickly customers receive their goods Activity-based management Throughput

Balanced Scorecard Measures Financial –Shareholder-relevant issues –Profitability –Organizational growth –Market price of stock Customer –Lead time –Quality –Service –Price Financial Customer Internal Business Learning and Growth

Balanced Scorecard Measures Internal Business –Quality –Cycle efficiency –Time to market –On-time delivery Learning and Growth –Number of patents or copyrights –Percentage of R&D projects that are patentable –Time of R&D from conception to commercialization Financial Customer Internal Business Learning and Growth

Multinational Performance Measures Flexible performance measures should recognize differences in sales volumes, accounting standards, economic conditions, and risks use qualitative measures such as market share, quality improvements, inventory management improvements, new product development

Traditional Compensation Strategy Top managers –salary and significant financial incentives Middle managers –salary and raises based on performance and bonuses Workers –wages and small bonuses

Pay-for-Performance Plans Correlation with organization goals –Maximization of shareholder wealth Appropriate time horizon –Long-run perspective –Reward with stock or stock options Subunit mission Employee perspective relative to commitment Balance of group and individual benefits

Profit Sharing Contingent on organizational success Current and/or deferred incentives in form of cash or stock Allocated among employees based on –personal performance measures –seniority –team performance –managerial judgment –specified formulas

Employee Stock Ownership Plan (ESOP) Profit-sharing compensation invested in company stock More valuable as company stock price increases Employees lose some or all benefits if company goes bankrupt

Global Compensation Expatriate compensation Domestic base salary and fringe benefits plus adjustments for –cost of living - housing, education, security, spouse’s loss of employment –currency fluctuations –tax implications –retirement benefits in home currency

Questions What are some short-term financial performance measures for investment centers? What factors should be considered when selecting nonfinancial performance measures? How is the balanced scorecard used to measure performance?

Potential Ethical Issues Excessive emphasis on short-term measures Pressure on managers to hit earnings targets Manipulating profits to create higher bonuses Evaluation of managers using uncontrollable criteria Backdating managerial stock options

Potential Ethical Issues Hiding performance criteria in evaluations Not providing timely feedback Ignoring non financial performance criteria Sub optimization by managers Compensating foreign workers in inappropriate ways