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Performance measurement and rewards within organisations.

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Introduction

1 Introduction Performance measurement has become more important as a tool for evaluation and reward purposes within organizations which emphasize on empowerment and decentralized decision makings, where managers are allowed to run their divisions as separate business enterprises. As a result, it is more often to reward managers based on divisional profits rather than the organization's overall performance. Traditional management accounting only uses financial performance to reward managers. However, this method is insufficient to provide a comprehensive picture of the internal activities within the organization and would encourage managers to adopt dysfunctional behaviour, such as refusing to invest in positive NPV projects to avoid lowering the overall "post investment ROI (Return on Investment)" in the division. These kinds of traditional accounting measure deficiencies have motivated a variety of performance measurement innovations ranging from "improved" financial metrics such as "Economic Value" measures to "Balanced Scorecards" of integrated financial and non-financial measures. In the following sections, I will first discuss some perceived inadequacies in traditional accounting-based performance measures, followed by the introduction and comparisons of the two new performance measurement approaches developed recently - Economic Value Added (EVA) by Stern Stewart Corporation and The Balanced Scorecard by Kaplan & Norton (1992). Finally, I will see what further researches can be used to test the effectiveness of these two approaches. ...read more.

Middle

I think the main advantage of the tailored GAAP is the inclusion of intangible investments such as R&D and marketing, to discourage mangers' myopic behaviour by treating investment in intangible in the same way as tangible assets. 4 Balanced Scorecard The Balanced Scorecard provides a number of mechanisms for aligning long-term strategic objectives with short-term actions. This suggests that as well as financial measures of performance, we should also pay attention to the requirements of customers, business processes and longer-term sustainability. This approach forces managers to develop a consensus around the firm's vision and strategy, and allows managers to communicate the firm's strategy throughout the organization. The four areas of performance are defined as follows: Financial perspectives - it is important to increase shareholder's value through revenue growth or productivity strategy. Customer perspective - the core of any business strategy is the customer value proposition. It defines how a company differentiates itself from competitors to retain, and deepen customer relationships. Internal Process perspective - captures the critical organizational activities a company undertakes to achieve the differentiated value proposition for customers and the productivity improvements for the financial objectives. Learning and Growth - this is the foundation of any strategy, this enables a company to align its human resources and information technology with the strategic requirements from it critical internal business processes, differentiated value proposition and customer relationships. ...read more.

Conclusion

Some research has to be done in order to validate the underlying assumption about the causal relationship in the BSC approach. Moreover, it is very important to test whether you can understand the strategy by looking at the scorecard and its strategy map. If so, one can say that the scorecards enable all organizational units and employees to understand the strategy and identify how they can contribute by becoming aligned to the strategy. Finally, BSC involves multiple objectives and measures, but we have not been told if all the measures are evenly important or how do we differentiate between them. This may result in diluting managers' attentions over too many measures and objectives simultaneously. 7 Conclusion Although there is little evidence to support the claim that EVA or BSC can actually improve a firm's overall performance, some companies may still choose to adopt new approach to measure performance. In my personal opinion, there is no single perfect system which works best on its own, as any approach has its costs and benefits. The most important point to remember when implementing new performance measurement is to get a right balance between its associated costs and future benefits to make the change worthwhile. And remember it is inadequate to look at only traditional accounting based measures to reward your managers, it is better to include both financial and non-financial measures as both tangible and intangible assets can generate value for your companies. AC 410 Essay Topic Question 4 ID: 200212043 1 ...read more.

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