Chapter 14: Performance Measurement, Balanced Scorecards, and Performance Rewards Cost Accounting: Foundations & Evolutions, 8e Kinney and Raiborn

Learning Objectives Why is a mission statement important to an organization? What roles do performance measures serve in organizations? What guidelines or criteria apply to the design of performance measures? What are the common short-term financial performance measures, and how are they calculated and used? Why should company management focus on long-run performance? What factors should managers consider when selecting nonfinancial performance measures? Why is it necessary to use multiple performance measures? How can a balanced scorecard be used to measure performance? What is compensation strategy, and what factors must be considered in designing the compensation strategy? What difficulties are encountered in trying to measure performance and design compensation plans for multinational firms?

Mission Statements and Value Statements Expresses the organization’s purposes Identifies how the organization will meet 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 Value Statements Reflects the organization’s culture Identifies fundamental beliefs about what is important to the organization

Performance Measures 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 Assess progress toward goals and objectives Awareness of and participation in developing measures Appropriate skills, equipment, resources, information, and authority to achieve goals and objectives Timely and useful feedback Flexible system for new conditions

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-Term vs. Long-Term Objectives Short-Term 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

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 Process quality yield Cycle efficiency Time to market On-time delivery Cost variances Learning and Growth Number of patents or copyrights Percentage of R&D projects that are patentable Time of R&D from conception to commercialization Percentage of capital invested in “high-tech” projects 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, and 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 the form of cash or stock Allocated among employees based on personal performance measures seniority team performance managerial judgment specified formulas

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 Hiding performance criteria in evaluations Not providing timely feedback Ignoring nonfinancial performance criteria Suboptimization by managers Compensating foreign workers in inappropriate ways