Blocher, Chapter 18, 19

T7: Performance Measurement System Langfield-Smith, Chapter 13

31 January 2021 23:53
Performance measurement & Control
Performance measurement: is the process by which managers at all levels gain Learning outcome:
information about the performance of tasks within the firm and judge that 1. Objective of
performance against pre-established criteria sets out in budgets, plans, and goals. management control
2. Types of management
Management Control Operational Control
control system and
Evaluation of upper-level management of Evaluation of operation-level managers factors affect the design
the middle-level managers performance from mid-level managers of management control
Focusses on higher-level managers and Detailed short term issues system
long term strategic issues 3. Objective and
application of strategic
Management-by-objectives - assigns sets Management-by-exceptions perf measure: cost,
of responsibilities to each mid-level revenue, profit and
managers based on functional area investment center
involved in scope of authority 4. Evaluating investment
center: ROI, RI, EVA
area of responsibility = SBU (well-defined 5. Transfer pricing -
sets of controllable operating managers ) international issue

Motivation of Management Control 4 Questions management must ask when developing

• Motivate managers to exert high level of efforts to management control system
achieve the goal set by top mgt 1. Who is interested in evaluating Owners, directors,
• Provide incentives for managers to make decision the org's perf? creditors, employees?
consistent with goals
→ that aligns with managers efforts with 2. What is being evaluated? Individual, team or SBU?
strategic goals 3. When is the perf evaluation be
• Determine a fairly the rewards earned by the conducted? Either based on
managers for their efforts and skills and master budget or flexible
effectiveness of their decision making budget?
→ Set objectives to reward fairly 4. Should the system be formal or
Employment Contract informal
• Develop employment control to achieve multiple
objectives
• It promotes goal congruence: the contract specifies
the managers' desired behaviours and the
compensation to be rewarded for achieving specific
outcome
• Written or unwritten, explicit or implicit
• Sets out three important aspects of management
performance that affect the contracting
relationship:
→ Uncertainty: The manager’s lack of control
means that there is some degree of
uncertainty about the effectiveness of the
manager’s actions, independent of the efforts
and abilities the manager brings of the job.
→ Risk Aversion: Risk preferences describe the
way individuals view decision options. most
likely to be motivated by supervision and
rewards that reduce risk
→ Lack of Observability: The efforts and
decisions made by the manager are often not
observable by top management. Manager's
independent - top mgt only observe outcomes

ACT4132 [MA 3] Page 1