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

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

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

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

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

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financial measures Attempts to link nonfinancial measures with financial results Excessive goals and measurements Outdated targets (goals) Failure to use interactive control Don’t try to integrate into Balanced Scorecard

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

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

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

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

Types of Incentives Financial Nonfinancial Money Benefits Perquisites Promotion Autonomy Recognition

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

Agency Theory 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 Each party will act in own best interest Each party will have different risk tolerances