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

2. 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

3. 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

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

5. 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?

6. 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Outdated targets (goals)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

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

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

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

10. 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

11. Types of Incentives Financial Nonfinancial Money Benefits Perquisites
Promotion
Autonomy
Recognition

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

13. 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