Ex Performance Measurement & Rewards Chapter Articles  “Performance Review: Perilous Curves Ahead”  “From Balanced Scorecard to Strategic Gauges: Is Measurement Worth It?”  “Risky Business: The New Pay Game”  “Why Incentives Cannot Work”

Performance: Units vs. Managers  Measure performance of operating units.  planning, decision-making, control  Measure performance of managers.  to hold managers responsible  an incentive to perform well  promotion, firing, pay raises …

 Performance of the manager might differ from performance of the unit. Performance: Units vs. Managers  expenses over which manager has no control  corporate overhead, rent, etc.  a good managers might be assigned to a poor division

 Should managers be rewarded?  incentives to perform well  attracts talented managers to the firm  might encourage dysfunctional behavior Rewards  Reward effort or performance?  effort is difficult to measure  performance = skill + effort + uncontrollable factors

 How much risk?  stronger incentives  greater risk  more uncertainty  greater risk  most managers are risk averse  Managers rarely have complete control.  rewards are risky…  … but they increase incentives Rewards

 Comparing operating units.  some comparisons are more meaningful than others:  ROI vs. income  % sales growth vs. $ sales growth Comparative Performance  an alternative: compare actual performance to a performance target

 Advantages of targets  standards against which performance can be judged  to help managers focus their effort Performance Targets  Disadvantages of targets  incentives to set a low target  incentives to manipulate the numbers

Performance Targets  How difficult should targets be?  conventional wisdom: tight but attainable  depends on how targets are used  difficulty tells manager where to direct attention

 Objective vs. subjective evaluation  objective measures don’t tell the whole story  subjective evaluations are harder to defend and tend to be overly positive Performance Criteria  Financial vs. non-financial measures  financial: the bottom line  non-financial: can be more forward-looking Satisfaction = 9.0