12.1 Explain the Importance of Performance Measurement
- Well-designed performance measurement systems help businesses achieve goal congruence between the company and the employees.
- Managers should be evaluated only on factors over which they have control.
- Performance measures can be based on financial measures and/or nonfinancial measures.
- Performance measurement systems should help the company meet its strategic goals while helping the employee meet his or her professional goals.
12.2 Identify the Characteristics of an Effective Performance Measure
- A good performance measurement system uses measures over which a manager has control, provides timely and consistent feedback, compares the measures to standards of some form, has both short- and long-term measures, and puts the goals of the business and the individual on an equal level.
12.3 Evaluate an Operating Segment or a Project Using Return on Investment, Residual Income, and Economic Value Added
- Three common performance measures based on financial numbers are return on investment, residual income, and economic value added.
- Return on investment measures how effectively a company generates income using its assets.
- ROI can be broken into two separate measures: sales margin and asset turnover.
- Residual income measures whether or not a project or a division is exceeding a minimum return that has been determined by management.
- Economic value added is used to measure how well a project or division is contributing to shareholder wealth.
- A big challenge with ROI, RI, and EVA is determining which value of income and assets to use in calculating these measures.
12.4 Describe the Balanced Scorecard and Explain How It Is Used
- Balanced scorecards use both financial and nonfinancial measures to evaluate employees.
- The four categories of a balanced scorecard are financial perspective, internal business perspective, customer perspective, and learning and growth perspective.
- Financial perspective measures are usually traditional measures, based on financial statement information such as EPS or ROI.
- Internal business perspective measures are those that evaluate management’s operational goals, such as quality control or on-time production.
- Customer perspective measures are those that evaluate how the customer perceives the business and how the business interacts with customers.
- Learning and growth perspective measures are those that evaluate how effectively the company is growing by innovating and creating value. This is often done through employee training.
- Well-designed balanced scorecards can be very effective at goal congruence through the utilization of both financial and nonfinancial measures.