In respect to other countries, Ismail (2007) found that Egyptians private companies rely on both financial and non-financial measures of performance evaluation. The profit margin, as a financial measure, is the most commonly used performance measure. Customer satisfaction is the most commonly used non-financial measure of performance evaluation. In China, Xiong et al (2008) conducted a survey of senior executive and senior financial officers of large or mid-size firms. The purpose of the study was to determine the current usage of nine performance measurement criteria among Chinese firms and to analyse the importance of these measures across twelve different uses. The results of the study show that most Chinese firms currently use both financial and non-financial measures in their PMS. In particular, the top three performance measurement criteria used are strategy related measures (66.5%), financial measures (63.8%) and objective and subjective measures (62.7%). The bottom three performance measurement criteria are customer oriented measures (49.8%), internal process measures (49.3%) and learning and innovation measures (30.8%). Jusoh, Ibrahim and Zainuddin (2008) found that non-financial measures are used among Malaysian manufacturing companies to a greater extent. For example, the use of customer measures such as on-time delivery, customer response time, number of customer complaints and surveys of customer satisfaction are high among Malaysian manufacturing companies. Furthermore, the study found that Malaysian manufacturing companies place a major weight on the use of internal business process measures but innovation measures do not seem to be widely used.
In the context of Jordan, few studies have investigated non-financial performance practices. The limitations of these studies are that they take the performance measures in aggregate form (Said, HassabElnaby & Wier, 2003). Zwelef and Nour (2005) found that Jordanian banks use both financial and non-financial measures to evaluate their performance. In particular, the study findings indicated that Jordanian banks use financial measures, customer measures, internal business process measures and learning and growth measures. Additionally, Hawamdah (2006) found that Jordanian listed industrial companies use both financial and non-financial performance measures. Zuriekat (2007) surveyed Jordanian listed manufacturing companies and found that the operational and customer category is used to a larger extent. The results also indicated that innovation, employee, supplier and quality categories are used to a moderate extent but the environment category tends not to be used by Jordanian manufacturing companies. In respect to the Jordanian public sector, Ababneh (2008) found that the customs department pays more attention to the growth and learning dimension of balanced scorecard approach followed by internal process and then customer satisfaction.
This study, however, extends previous research concerning the usage and practices of performance measures by investigating the extent of the use of thirty financial and non-financial measures across six categories including financial, internal business process, innovation and learning, customer, community and environment.
Importance of performance measures usage
Effective performance measurement allows a firm to implement sound strategy, guide employee behaviour, assess managerial effectiveness, and provide the basis for employee rewards (Malina & Selto, 2004). The selection of performance measures which are appropriate to a particular company ought to be made in the light of the company’s strategic priorities which will have been formed to suit the competitive environment in which it operates and the nature of its business. In choosing an appropriate range of performance measures, it will be necessary to balance them, to make sure that one measure or set of measures of performance is not emphasised to the detriment of others. In this context, Maltz, Shenhar and Reilly (2003, p.199) argued that any prescription for performance measurements should be simple, dynamic, and flexible over time, foster improvement, and be linked to the company’s strategy and objectives. Notably, Franco-Santos et al (2007) and Neely, Mills, Platts, Gregory & Richard (1994) argued that deriving performance measures from strategy does not always happen in reality. Franco-Santos et al (2007, pp. 796-797) argued that there are many measurement systems within businesses that have only operational goals, which may or may not be linked to strategy.
However, Kim, Park and Yoon (1997) argued that a performance measurement should provide timely, accurate feedback on the efficiency and effectiveness of an activity operation in any environment. In this context, Malina and Selto (2004) argued that performance measurement should improve decision-making, reflect system causality, and facilitate communication, learning and creation of new knowledge. Similarly, Hwang, Lee, Liu and Ouyang (2009) argued that PMS play a critical role in evaluating the achievement of firm goals, compensating managers, and developing strategies. The essential function of a PMS is to assess how well the activities within a process, or the outputs of a process, achieve specified goals. This includes a comparison of actual results with a planned goal and an assessment of the extent of any deviation from the standard goal ( Chen, 2008; Ahmad & Dhafr, 2002).
Empirically, Stivers et al. (1998) examined the importance of 21 non-financial measures in setting company goals in USA and Canada. The study findings indicated that of the 253 responding firms, 235 (92.9%) rated customer satisfaction and delivery performance/customer service as highly important. Product/process quality was rated as highly important by 206 (81.4%) of the responding firms and service quality by 205 (81.0%) of the 253 firms. Thus, customer service measures are perceived to be the most important measures. Market performance and goal achievement also are perceived to be highly important categories. Market share in the market performance categories was rated highly important by 200 (79.1%) of the responding firms. Productivity in the goal achievement category was rated highly important by 211 (83.4%) of the 253 firms. Factors in the innovation and employee involvement categories were perceived to be less important in goal setting. For example employee turnover in the employee involvement category was rated as highly important by only 122 (48.2%) of the 253 firms. However, in this paper an individual measure was identified as highly important if it received a rating of four or greater on the five-point scale of importance.
Xiong et al (2008) conducted a survey of senior executive and senior financial officers of large or mid-size firms. The purpose of the study is to determine the current extent of usage of nine performance measures among Chinese firms and to analyse the importance of these measures across twelve different uses. Findings of the study show that the top four performance measurement effects with a high important score are profit increase (59.5%), motivating employees (54.7%), cost reduction (51.6%) and helping employees understanding enterprise strategy (48.1%). In their study to investigate whether the strategic priorities of an organization are associated with the use and effectiveness of specific performance measures, Verbeeten and Boons (2009) included an additional question on the importance of the performance measures for several goals. Their findings indicated that the PMS is important or very important for: operational decisions (85%), strategic decisions (80%), evaluating economic performance (71%), evaluating managerial performance (70%), rewarding employees (68%) and communication of strategy (50%). In addition, Verbeeten and Boons (2009) investigated whether specific measures are used for specific purposes. Their results indicated that financial and non-financial measures are used more frequently for operational and strategic decisions. On the other hand, budget, return on total capital (ROTC), process and innovation measures are used to a larger extent for incentive purposes. Finally, non-financial measures of customer and innovation are more important for the communication of strategy. Veen-Dirks (2010) examined how the importance that is attributed to a variety of financial and non-financial performance measures depends on the following two purposes: periodic evaluation of performance and determination of rewards. The empirical evidence in this study is based on a survey among 84 industrial companies located in the Netherlands. Multiple interviews were conducted with both production managers and management accountants. The study provides evidence of a higher importance attached to both financial and non-financial performance measures in the periodic evaluation than in the determination of rewards. The results of the studies above indicate that PMS is used for many purposes other than evaluating and rewarding managers (Verbeeten & Boons, 2009).
Methodology
A questionnaire survey was used to determine the performance measurement practices among Jordanian companies and to identify the main purposes of using performance measures. Using the number of workers per establishment for the definition of medium and large enterprises, this study focuses on medium and large industrial companies. Thus, the sample frame includes those industrial companies with 50 employees and above to ensure that the sample companies have a formal PMS (see Hutaibat, 2005; Perera et al, 1997; Van der Stede et al, 2006). The proposed sampling frame consisted of 372 industrial companies. The questionnaires were conducted using financial managers or those in a similar position such as the head of the accounting department, assistant financial manager or management accountant.
Each company was contacted by telephone before sending out the questionnaire to give them some idea of the study's objectives, to invite them to participate in the study and to check the accuracy of postal address details. Based on the results of the telephone calls, the questionnaires were then sent to respondents who agreed to participate in the study by post with a covering letter and a prepaid self-addressed return envelope. Only 27 companies refused to participate in the study. The main reasons cited for not participating were: management policy of non-participation and the lack of time. Another 6 companies were eliminated from the original sample because their phone numbers were disconnected and they ceased service with the Jordanian Telecommunication Company. Thus, the questionnaire was sent out to 339 companies. The questionnaires were left with the respondent for about ten days to enable completion. Follow-up telephone calls were made. A total of 179 questionnaires were returned including 168 usable questionnaires with a response rate of 49.9%. Details about the number of employees, sales turnover and sector classification are presented in Table 1 (see list of tables at the end of the paper).
The questionnaire was pre-tested based on a pilot study with 15 academics and financial managers of industrial companies in Jordan. The first two sections of the questionnaire include some demographic questions about the organization itself and the respondent. The third section of the questionnaire covered the extent of usage of a diverse set of financial and non-financial measures of performance by Jordanian industrial companies. This section of the questionnaire investigated the extent (i.e. frequency) of usage of a broad set of financial and non-financial measures across six categories including thirty measures drawn from the literature (Jusoh et al, 2008; Lau & Moser, 2008; Iselin, Mia & Sands, 2008; Franco-Santos, 2007; Gomes et al., 2007; Leung, Lam & Cao, 2006; Henri, 2006; Widener, 2006; Ittner et al, 2003; Maltz et al, 2003; Sohn, You, Lee & Lee, 2003; Hoque et al, 2001; Hoque & James, 2000). The choice of these measures was dependent on the criteria of the King Abdullah II award for excellence in private sector (King Abdullah II Center for Excellence, 2009). Furthermore, the choice of these measures was revised as a result of a pilot study. The respondents in the pilot study were given the opportunity to omit and suggest these measures depending on their actual usage. Furthermore, to cover all the measures that an organisation uses, this section also included spaces for participants to list and rate other measures that they use but were not included in the questionnaire (Iselin et al., 2008; Widener, 2006). Consistent with previous research (e.g. Ismail, 2007; Kald & Nilsson, 2000), section four includes ten potential uses for performance measures adapted from the previous literature (Verbeeten & Boons, 2009; Franco-Santos, 2007; Malina & Selto, 2004). Finally, the five-point Likert scale was used in formatting the questionnaire.
Insert Table 1 here
Results and discussion
Performance Measures Practices
When all 30 performance measures were ranked in terms of their frequency and mean usage , Table 2 (see list of tables at the end of the paper) shows that Jordanian industrial companies are using both financial and non-financial measures. This result is consistent with the findings of previous studies conducted among Jordanian industrial and manufacturing companies (Zuriekat, 2007; Hawamdah, 2006; Hutaibat, 2005) which indicated that Jordanian companies use multiple measures of performance (financial and non-financial). The result is also consistent with the finding of Zwelef and Nour (2005) which was conducted in the Jordanian bank sector. Further, the result is consistent with the findings of previous research (Jusoh et al, 2008; Gomes et al., 2007; Ismail, 2007; Gosselin, 2005). The results presented in the table show that four out of seven financial measures were ranked as “used to a great extent” or “used to a very great extent” by more than 70% of the respondent companies with means ranging from 3.98 to 4.19. These measures include cost per unit produced (79.7%) sales growth (76.2%) operating income (77.4%) and return on investment (70.2). These results are also consistent with that of Joshi (2001) who surveyed large and medium-sized Indian manufacturing and found a high rate usage for financial measures. In addition, ROE and budget variances were ranked as “used to a great extent” or “used to a very great extent” by more than 60% of the respondent companies with means of 3.79 and 3.76 respectively. Consistent with the findings of Jusoh et al (2008), EVA is the only financial measure that seems to be used to a small moderate extent among Jordanian industrial companies as it ranked as “used to a great extent” or “used to a very great extent” by only 26.8% with a mean of 2.69. However, previous research has criticised EVA in that it is complex and difficult to use (for example. Jusoh et al, 2008; Ittner & Larcker, 1998;), costly (for example Lovata & Costigan, 2002) and not superior to traditional accounting measures (for example Jusoh et al, 2008; Yeniyurt, 2003). These reasons may also justify the low usage of this measure among Jordanian industrial companies.
Contrary to the findings of Joshi (2001), the results show that Jordanian industrial companies put more emphasis currently on non-financial measures. This result is also consistent with that of previous research (for example Verbeeten & Boons, 2009; Jusoh et al, 2008; Gomes et al., 2007; Widener, 2006; Hyvönen, 2005; Abdel-Maksoud, Dugdale & Luther, 2005; Chenhall & Langfield-Smith, 1998; Bhimani, 1994; Drury et al, 1993). The use of customer measures is high among Jordanian industrial companies. Table 2 shows that customer response time, on-time delivery, customer retention and survey of customer satisfaction are ranked at the top of the list since they were ranked as “used to a great extent” or “used to a very great extent” by 81.5%, 79.7%, 79.2% and 76.8% respectively with means ranging from 4.06 to 4.10. This result is consistent with Jusoh et al (2008) who found that the use of customer measures such as on-time delivery, customer response time, number of customer complaints and survey of customer satisfaction was high among Malaysian manufacturing companies. Similar results were found in studies by Hoque et al (2001) and Stivers et al (1998).
Most of the innovation and learning measures are also common among Jordanian industrial companies especially those measures that focus on employees. Three of the four employee measures were ranked as “used to a great extent” or “used to a very great extent” by more than 60% of the respondent companies with a mean ranging from 3.73 and 3.89. In particular, the findings indicated that 69.1% of the respondent companies use employee training measure, 61.3% use employee safety measure and 60.7% use employee skill development measure. On the other hand, employee authorisation measure tends to be used to a moderate extent with a mean of 3.01. The number of new product launches is also a common innovation measure among Jordanian industrial companies. It was ranked as “used to a great extent” or “used to a very great extent” by 55.3% of the respondent companies with a mean of 3.54. Time-to-market new products tends to be used to a moderate extent. It was ranked as “used to a great extent” or “used to a very great extent” by 46.4% of the respondent companies with a mean of 3.29. Consistent with the findings of previous research (Jusoh et al, 2008; Hoque et al, 2001; Hoque & James, 2000), the number of new patents was ranked as “used to a great extent” or “used to a very great extent” at the bottom of the list as nominated by 24.4% of the respondents.
The results showed that two of the internal business process measures are commonly used among Jordanian industrial companies. These measures were ranked as “used to a great extent” or “used to a very great extent” by more than 65% of the respondent companies. These measures include labour efficiency variance (70.3%) and defect rates (67.9%). Rate of material scrap loss and manufacturing lead time seems to be used to a moderate extent as they ranked as “used to a great extent” or “used to a very great extent” by 51.8% and 44.0% of the respondent companies respectively.
Jordanian industrial companies place greater emphasis on the use of environment measures. Environmental compliance measure seems to be significantly used by Jordanian industrial companies. This measure was ranked as “used to a great extent” or “used to a very great extent” by 78.5% of the respondent companies with a mean of 4.05. Reducing wastes and emissions and environmental certification were also ranked by 57.2% and 53.0% of the respondents respectively.
Finally, the results indicate that community measures are the lesser used measures among Jordanian industrial companies. Public image was ranked first among the community measures being reported by 57.1% of respondents as “used to a great extent” or “used to a very great extent” with a mean of 3.54. Community involvement, support of charity projects, support of social activities and participation in training and education tend to be ranked at the bottom of the list in comparison with other measures as they were ranked as “used to a great extent” or “used to a very great extent” by only 37.5%, 27.3%, 26.2% and 23.2% respectively.
Insert Table 2 here
To identify the perspectives of performance measures, factor analysis with varimax rotation was used. Three items (EVA, Labour efficiency variance and public image) were deleted from the analysis. EVA was deleted due to insignificant factor loading, while labour efficiency variance and public image were deleted due to cross loading (Jusoh et al, 2008; Lau & Sholihin, 2005). From factor analysis, seven component factors were extracted with eigenvalues exceeding 1, explaining a total of 69.32 per cent of the variance. All the Cronbach alpha values are above the 60.0% and ranged from 69.8% to 89.0% (Henri et al, 2006). This result indicated that all the measures were reliable. These results were expected, as all the measures used in the research were based on well- developed questionnaire with high reliability scores from previous studies (for example Jusoh et al, 2008; Maiga & Jacobs, 2003; Hoque & James, 2000). Consistent with the previous research in the field (for example Iselin et al, 2008; Lau & Sholihin, 2005; Maiga & Jacobs, 2003; Hoque et al, 2001; Hoque & James, 2000), the first component factor was named financial, the second component factor was named community, the third component factor was named customer, the fourth component factor was named employee, the fifth component factor was named environment, the sixth component factor was named innovation and the seventh component factor was named internal business process.
After factor analysis, descriptive statistics on the seven perspectives are displayed in Table 3. The table shows that responding companies place a major weight on the use of customer measures with a mean of 4.08 followed by financial perspective (4.00), environment perspective (3.71), employee perspective (3.59), internal business process perspective (3.42), innovation perspective (3.07) and community perspective (2.92).
Insert Table 3 here
To understand better the usage of financial and non-financial measures among Jordanian industrial companies, Table 4 shows that, in general, Jordanian companies put more emphasis on the use of financial measures with a mean of 4.00. The table also shows that Jordanian companies use non-financial measures to a considerable extent with a mean of 3.47. Finally, the table shows that Jordanian companies use a diverse set of financial and non-financial measures with a mean of (3.54). This result is consistent with the findings of previous research (Jusoh et al, 2008; Gomes et al, 2007; Ismail, 2007; Gosselin, 2005).
Insert Table 4 here
Aims of Performance Measures Usage
It has been argued that it is important that researches clarify in their studies the different roles that the performance measures play in the firms they are investigating (Franco-Santos, 2007). Previous research has determined that there are many uses for performance measures. In this context, Moers (2006) measured the importance of performance measures for evaluation purposes, monetary compensation and non- monetary rewards. Ittner et al (2003) examined a broad set of performance measures use, which include goal setting, capital investment decisions, problem identification, performance evaluation and external disclosure. Henri and Journeault (2008) examined the importance of measurement and use of environmental performance indicators (EPIs) within Canadian manufacturing firms. In particular, the study examines four uses for EPIs, namely to monitor compliance with environmental policies and regulation, to motivate continuous improvement, to provide data for internal decision-making and to provide data for external reporting.
As shown in Table 5 most of the listed purposes were ranked as "to a great extent" or " to a very great extent" by more than 50% of the respondent companies with a mean ranging from 3.49 to 4.29. These purposes were: comply with legal requirements (85.7%), evaluate organisational performance (88.7%), supervise managers' productivity (78.6%), evaluate managerial performance (75.0%), encourage improvement of business processes (69.6%), reward employees (61.3%), manage operations processes (60.7%) and provide better understanding of the cause-effect relationship (51.2%). Informed decision-making and communicate strategy were ranked at the bottom of the list by 50% or less of respondents.
Although Jordanian companies place more emphasis on the use of performance measures to evaluate organisational and managerial performance, they also use them for other reasons. This finding is consistent with the argument of Verbeeten and Boons (2009) in that the PMS is used for many purposes other than solely evaluating and rewarding managers. The findings indicate that about 85.7% of Jordanian industrial companies use performance measures mainly to comply with legal requirements. This result indicates that Jordanian industrial companies still operate under significant institutional and government controls (Hussain & Gunasekaran, 2002; Hussain & Hoque, 2002). There is an opportunity as a result to investigate the effect of some institutional factors on the extent of use of performance measures in Jordan in future research.
The findings also indicate that Jordanian industrial companies put less emphasis on the role of performance measures in providing a better understanding of the cause-effect relationship, informing decision making and communicating strategy as these aims were ranked at the bottom of the list as shown in Table 5. This result indicates that Jordanian companies use a diversity of financial and non-financial performance measures as an improved PMS and not as a strategic PMS (Malmi, 2001). This is because these three aims were identified as important attributes of performance measures in previous research (Hwang et al, 2009; Franco-Santos et al, 2007; Malina & Selto, 2004; Kim et al, 1997). Thus, Jordanian companies should direct their attention to these three aims in future.
In summary, the study findings indicate that Jordanian industrial companies use performance measures primarily to evaluate managerial and organisational performance. They also use performance measures to a significant extent to comply with legal requirements. The results also indicate that Jordanian companies pay less attention to communicating strategic decisions and cause-effect relationship in using these measures.
Insert Table 5 here
Conclusion
Our knowledge about how Jordanian companies use and design performance measurements is very limited. Thus, this study is a preliminary attempt to cover the following two related issues: the extent of performance measures usage and the purposes or aims of their usage. A questionnaire-based survey was used to investigate these phenomena. The survey findings indicated that Jordanian industrial companies use multiple performance measures in terms of financial and non-financial in their performance measurement systems.
The study findings also indicated that Jordanian industrial companies use performance measurements primarily to evaluate managerial and organizational performance. They also use performance measurement largely to comply with legal requirements. The results also indicated that Jordanian companies pay less attention to the communication of strategic decisions and cause-effect relationship in using these measurements. Consequently, three outcomes can be drawn from these results:
Although Jordanian companies place more emphasis on the use of performance measures to evaluate organisational and managerial performance, they also use them for other reasons. This result supports the idea that the PMS is used for many purposes other than solely evaluating and rewarding managers (Verbeeten & Boons, 2009).
The results indicate that Jordanian industrial companies still operate under significant institutional and government controls since they put more emphasis on using such measures to comply with legal requirements (Hussain & Gunasekaran, 2002; Hussain & Hoque, 2002).
The findings indicate that Jordanian industrial companies put less emphasis on the role of performance measures in providing a better understanding of the cause-effect relationship, informing decision making and communicating strategy in comparison with other purposes. This indicates that some Jordanian companies use measurement diversity approach as an improved PMS and not as strategic PMS (Malmi, 2001).
Tables
Table 1 Profile of the responding firms
Table 2 Performance measures usage among Jordanian industrial companies
Continued Table 2 Performance measures usage among Jordanian industrial companies
Table 3 Descriptive statistics for the usage of different performance perspectives
Table 4 Descriptive statistics for the usage of financial measures, non-financial
measures and all measures
Table 5 Specific aims of performance measurements
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The medium enterprises are those with 50-249 employees and the large enterprises are those with more than 250 employees (Ministry of Industry and Trade, 2008).
The measures are divided into three groups to help discussions: relatively high use (a mean equal or above 3.5), relatively moderate use (a mean equal or above 2.5) and relatively low use (a mean below 2.5) (Al-khatatneh, & Al-Sa'aydeh, 2009; Jänkälä, 2007; Stivers et al, 1998).
