PERFORMANCE

MEASUREMENT
(EVALUATION SYSTEMS)
Next class: Amos Police Force
Assignment #2 available on-line due March 17
th
CMA
CMA NS Information Session
Date: March 24
Time: 11:15am
Location: 190 Schwartz

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
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
Effective Performance Measurement
System
Theory and Practice Guideline
Most individuals are motivated by
self-interest.
Performance-based rewards must
be greater than alternative rewards
from nonperformance.
Organizations get the behavior they
reward.
Performance measures and related
rewards must reflect organizational
goals.
Effort follows rewards. Employees must believe that their
efforts influence performance.
Difficult but attainable goals
motivate best.
Impossible goals are de-motivators,
and so are easy goals. Make goals
difficult but not impossible.
Fairness is a basis for sustained
motivation.
Rewards must be linked to desired
performance in a fair manner.
Manipulation undermines fairness
and effort.
Performance measures must be
observable and verifiable.
Different rewards can motivate
effort.
Rewards must meet market
conditions, and rewards must be
available.
Incentive systems involve trade-offs. Minimizing the overall costs of
aligning goals and monitoring
behavior is a goal of incentive
system design.
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
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
WHAT MAKES AN
EFFECTIVE
PERFORMANCE
MEASUREMENT
SYSTEM?
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)

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
WHAT ARE SOME
TRADITIONAL
MEASURES OF
PERFORMANCE?
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
WHY ARE
TRADITIONAL
PERFORMANCE
MEASURES
INADEQUATE?
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.
WHAT ARE NON-
TRADITIONAL
PERFORMANCE
MEASURES?
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.
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

WHY ARE NONFINANCIAL
MEASURES NOT WELL
UTILIZED IN
PERFORMANCE
MEASUREMENT?
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