Transcript Management Control Systems

Performance Measurement &
Management Compensation
Chapters 10 & 11,
Management Control Systems, 12th Ed.,
Anthony and Govindarajan
Performance Measurement
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Purpose is to implement strategy
Should look at both short- and long-term
Must measure critical success factors
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Current
Future
Used to motivate and reward people
The Balanced Scorecard
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Simply put, it’s a performance
measurement system
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Provides goals
Provides measurement metrics
It must be based on strategy
Should stress what’s important for the
organization
The Balanced Scorecard
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Basic example deals with 4 perspectives
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Financial (external)
Customer
Internal business (processes)
Innovation & Learning
Can be expanded to encompass other
areas
Implementation
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What’s the organizational strategy?
What’s the specific goal?
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How is it to be measured?
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Must be measurable
Must provide for quantification
Does it integrate measures into the
evaluation system?
Are the results reviewed frequently?
What to Avoid
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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Outdated targets (goals)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
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Don’t try to integrate into Balanced Scorecard
Management Compensation
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Should seek goal congruence
Should provide positive incentives
Should be focused on a “team effort”
Should require conformance to standard
procedures
Compensation Plans
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Normally consists of
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Salary (contract driven)
Benefits (contract driven)
Incentives (performance driven)
Usually divided into
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Short-term
Long-term
Short-Term Incentive Plans
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Normally based on performance in a given
year
Examples include
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Bonus pools, carryovers, and deferred
compensation
Long-Term Incentive Plans
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Normally based on the company’s
performance over a period greater than
one year
Examples include
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Stock options, phantom shares, stock
appreciation rights, performance shares, and
performance units
Types of Incentives
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Financial
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Money
Benefits
Perquisites
Nonfinancial
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Promotion
Autonomy
Recognition
Performance Criteria
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Reasonable and understandable
Adjustable, as needed
Orient on both
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Short-term performance
Long-term performance
Measurable against planned
Agency Theory
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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
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Each party will act in own best interest
Each party will have different risk tolerances