Performance Measurement (Evaluation Systems)

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Performance Measurement (Evaluation Systems)

• Next class Amos Police Force
• Assignment 2 available on-line due March 17th

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CMA

• CMA NS Information Session
• Date March 24
• Time 1115am
• Location 190 Schwartz

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Performance Measurement

• Performance measurement systems are an integral
  part of the management control systems
• Management control is a process through which
  management ensures that resources are obtained
  and used effectively and efficiently in
  accomplishing the organization's goals
• To be most effective performance measures should
  be tied to the strategic objectives of the
  organization
• Two key principles of performance measurement
• Measurement of performance
• Compensation based on measured performance

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Performance Measurement Theories of Incentives
and Behavior

• Expectancy theory (from applied psychology)
• People are motivated to act in ways that they
  expect to provide them with desired rewards and
  to prevent the penalties they wish to avoid.
• So incentive plans must
• Provide the proper rewards and penalties
• Make it likely that the desired behaviors will
  lead to those rewards or penalties

• Agency theory (from financial economics)
• An employee contracts with an employer to perform
  certain work, and the employer wants to be sure
  that the work is duly and well performed.
• So incentive plans must
• Motivate the employee to work
• Align the employees goals with the employers

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Effective Performance Measurement System
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Uses of Performance Measurement

• 1) Monitoring
• 2) Decision Making
• 3) Attention Focus
• 4) Legitimization
• 5) Compensation income is not guaranteed but
  dependent on performance
• 6) Translating and implementing strategy

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Dysfunctional Outcomes of Performance Measurement

• Fundamentals problems exist in performance
  measurement if the unintended behavior is created
• Designers of incentive plan can be surprised to
  find that these systems create unintended
  behavior
• Examples
• Credit Lending performance measurement was
  of credit extended
• Enron performance measured by stock price and
  revenue recognition

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What makes an effective performance measurement
system?
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Effective Performance Measurement System

• Given the goals of the company which alternative
  incentive will motivate the desired behavior?
• Unlikely a single measure or even several
  measures will effectively assess performance
• assesses progress toward organizational goals and
  objectives - promote intended behavior
• includes critical success factors
• a mix of financial and nonfinancial multiple
  measures
• congruent with reward systems pay performance
  link
• participatory and easy to understand by employees
• absolute vs relative evaluation
• Various types of compensation (e.g. salary,
  bonuses, options)

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Effective Performance Measurement System

• feed back provided
• Include both short and long term measures
• employees in appropriate jobs appropriate
  performance expectations
• attainable performance levels
• measures are observable (objective vs.
  subjective)
• responsibility and control is considered (overall
  vs. divisional)
• limit ability to manage/manipulate outcome
  measures

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What are some traditional measures of performance?
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Traditional Performance Measures

• Some monetary measurement of income is used by
  virtually all businesses to assess performance
• Financial measures do not address issues of
  competitive reality
• 1) Cash flow
• 2) Return on Investment
• 3) Residual Income
• 4) Economic Value Added

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Why are traditional performance measures
inadequate?
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Problems with Traditional Measures

• 1) Overly aggregate
• 2) Not Timely
• 3) Backward looking
• 4) Promote dysfunctional behavior in the short
  term.
• 5) Not one measure or type of measure can
  realistically capture performance.

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What are non-traditional performance measures?
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Nonfinancial Performance Measures

• Traditional financial measures are easy to
  measure but inadequate
• Non-financial measures are being used
  increasingly instead of traditional systems
• Focus on the leading indicators of profit
• Recognition of the time lags between non
  financial and financial performance.

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Nonfinancial Performance Measures (contd)

• Non financial performance measures create
  shareholder wealth
• Non financial measures better predict future cash
  flows
• A large scope of nonfinancial performance
  measures relate to critical success factors.
• Intellectual capital becoming the basis of
  competitive advantage
• What gets measured gets done
• Customer service is an important measure

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Why are nonfinancial measures not well utilized
in performance measurement?
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Non-Financial Measure - Current Practice

• Importance-measurement gap
• Measurement-use gap
• Susceptible to measurement problems
• Difficult to measure effectively (accuracy,
  ambiguity, timeliness)
• Lead-lag relationship