Measuring general managers' performances

Purpose - This paper discusses how to choose a measure or set of measures for the purposes of evaluating and rewarding general managers' performances. Design/methodology/approach - The paper describes a set of criteria that is useful for evaluating any measure or set of measures. Then it applies the criteria to an evaluation of three measurement alternatives in common use at general management organization levels: market measures, accounting measures, and combinations of measures. Findings - The paper shows that all of the measurement alternatives fail to satisfy one or more of the evaluation criteria and, hence, lead to less than optimal outcomes. But it also shows that some alternatives are better than others in specific situations. Originality/value - While comprehensive sets of evaluation criteria have been applied to financial accounting choice issues, this is the first such approach in management accounting. This approach can lead to improved performance measurement system choices. It can also be used to guide future research because the analysis also reveals major gaps in our knowledge about the qualities of performance measures in common use.

[1]  D. Larcker,et al.  Coming up short on nonfinancial performance measurement. , 2003, Harvard business review.

[2]  Al Ehrbar,et al.  EVA: The Real Key to Creating Wealth , 1998 .

[3]  Hanne Nørreklit.  The Balance on the Balanced Scorecard: A Critical Analysis of Some of Its Assumptions , 2000 .

[4]  Hanne Nørreklit.  The Balanced Scorecard: what is the score? A rhetorical analysis of the Balanced Scorecard , 2003 .

[5]  Andy Neely,et al.  The Performance Prism: The Scorecard for Measuring and Managing Business Success , 2002 .

[6]  C. Wihlborg,et al.  Recognizing Macroeconomic Fluctuations in Value Based Management , 2003 .

[7]  B. Lev.  Intangibles: Management, Measurement, and Reporting , 2001 .

[8]  L. Brooks,et al.  The January Anomaly: Effects of Low Share Price , 1992 .

[9]  Kenneth A. Merchant,et al.  The effects of financial controls on data manipulation and management Myopia , 1990 .

[10]  Bengt Holmstrom,et al.  Moral Hazard and Observability , 1979 .

[11]  Todd Milbourn,et al.  EVA versus Earnings: Does it Matter which is More Highly Correlated with Stock Returns? , 2000 .

[12]  Ross L. Watts,et al.  Conservatism in Accounting - Part Ii: Evidence and Research Opportunities , 2003 .

[13]  Patricia M. Dechow,et al.  Executive incentives and the horizon problem: An empirical investigation , 1991 .

[14]  Marc R. Reinganum.  The anomalous stock market behavior of small firms in January: Empirical tests for tax-loss selling effects , 1983 .

[15]  E. Fama,et al.  Dividend yields and expected stock returns , 1988 .

[16]  Oliver Kim,et al.  Incentive efficiency of compensation based on accounting and market performance , 1993 .

[17]  Richard G. Sloan.  Accounting earnings and top executive compensation , 1993 .

[18]  Steven E. Salterio,et al.  The Balanced Scorecard: Judgmental Effects of Common and Unique Performance Measures , 2000 .

[19]  Steven E. Salterio,et al.  A note on the judgmental effects of the balanced scorecard's information organization , 2002 .

[20]  David Otley,et al.  Performance Management: A Framework for Management Control Systems Research , 1999 .

[21]  Scott E. Stickel.  The effect of value line investment survey rank changes on common stock prices , 1985 .

[22]  R. Thaler,et al.  Does the Stock Market Overreact , 1985 .

[23]  G. Kominis,et al.  The expectancy–valence theory revisited: Developing an extended model of managerial motivation , 2007 .

[24]  Michael Gibbs,et al.  Determinants and Effects of Subjectivity in Incentives , 2004 .

[25]  T. Jones.  INSTRUMENTAL STAKEHOLDER THEORY: A SYNTHESIS OF ETHICS AND ECONOMICS , 1995 .

[26]  Henry L. Tosi.  A Theory of Goal Setting and Task Performance , 1991 .

[27]  S. Kerr.  On the folly of rewarding A, while hoping for B. , 1975 .

[28]  James A. Ohlson,et al.  Aggregate accounting earnings can explain most of security returns: The case of long return intervals☆ , 1992 .

[29]  K. French.  Stock returns and the weekend effect , 1980 .

[30]  Rajiv D. Banker,et al.  Sensitivity, Precision, and Linear Aggregation of Signals for Performance Evaluation , 1989 .

[31]  K. Merchant,et al.  Management Control Systems: Performance Measurement, Evaluation and Incentives , 2003 .

[32]  Gary C. Biddle,et al.  Does Eva Beat Earnings? Evidence on Associations with Stock Returns and Firm Values , 1997 .

[33]  Avraham Kamara.  New Evidence on the Monday Seasonal in Stock Returns , 1997 .

[34]  M. BacidoreJeffrey,et al.  The Search for the Best Financial Performance Measure , 1997 .

[35]  Gregory W. Brown,et al.  Market reaction to public information: The atypical case of the Boston Celtics , 2001 .

[36]  Michael T. Jacobs,et al.  Short-Term America: The Causes and Cures of Our Business Myopia , 1991 .

[37]  E. Ziegel,et al.  The Balanced Scorecard , 1998 .

[38]  Gerald A. Feltham,et al.  Performance Measure Congruity and Diversity in Multi-Task Principal/Agent Relations , 2007 .

[39]  M. C. Jensen.  Value Maximisation, Stakeholder Theory, and the Corporate Objective Function , 2001 .

[40]  Henry Mintzberg,et al.  The Fall and Rise of Strategic Planning , 1994 .

[41]  Oliver Hart,et al.  Foundations of Incomplete Contracts , 1998 .

[42]  William R. Kinney,et al.  Capital market seasonality: The case of stock returns , 1976 .

[43]  Richard G. Sloan,et al.  Information in prices about future earnings: Implications for earnings response coefficients , 1992 .

[44]  E. Fama,et al.  Size and Book-to-Market Factors in Earnings and Returns , 1995 .

[45]  D. Larcker,et al.  Are nonfinancial measures leading indicators of financial performance? An analysis of customer satisfaction , 1998 .

[46]  Sybille Sachs,et al.  Changing managers’ values towards a broader stakeholder orientation , 2005 .

[47]  M. Malone,et al.  Intellectual Capital: Realizing Your Company's True Value by Finding Its Hidden Brainpower , 1997 .

[48]  R. Litan,et al.  The Future of Domestic Capital Markets in Developing Countries , 2003 .

[49]  Todd T. Milbourn,et al.  Incentive Compensation when Executives can Hedge the Market: Evidence of Relative Performance Evaluation in the Cross Section , 2003 .

[50]  A. Bandura.  Self-efficacy: toward a unifying theory of behavioral change. , 1977, Psychological review.

[51]  R. Freeman.  Strategic Management: A Stakeholder Approach , 2010 .

[52]  Marshall W. Meyer,et al.  Subjectivity and the Weighting of Performance Measures: Evidence from a Balanced Scorecard , 2003 .

[53]  S. Basu,et al.  Investment Performance of Common Stocks in Relation to their Price-Earnings Ratios , 1977 .

[54]  Hardy M. Thomas,et al.  On the empirical relationship between market value and residual income in the U.K. , 1998 .

[55]  Kevin J. Murphy.  Chapter 38 Executive compensation , 1999 .

[56]  Bernard Salanié,et al.  The Economics of Contracts: A Primer , 1997 .

[57]  David Aboody,et al.  CEO stock option awards and the timing of corporate voluntary disclosures , 2000 .

[58]  Ross L. Watts,et al.  Conservatism in Accounting - Part I: Explanations and Implications , 2003 .

[59]  R. Banker,et al.  The Balanced Scorecard: Judgmental Effects of Performance Measures Linked to Strategy , 2004 .

[60]  Richard H. Thaler,et al.  Do Security Analysts Overreact , 1990 .

[61]  M. C. Jensen.  Value Maximization, Stakeholder Theory, and the Corporate Objective Function* , 2001, Business Ethics Quarterly.

[62]  R. Banz,et al.  The relationship between return and market value of common stocks , 1981 .

[63]  Matching Delivered Performance , 2005 .

[64]  Jean Tirole,et al.  Incomplete contracts: Where do we stand? , 1999 .

[65]  Kenneth A. Merchant,et al.  Rewarding results : motivating profit center managers , 1989 .

[66]  R. Thaler,et al.  A Survey of Behavioral Finance , 2002 .