Chapter 19 – Strategic Performance Measurement—Investment Centers
employee commitment or financial performance). Such analysis can
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take various forms, from the simple (e.g., looking for statistically
significant differences between organizational subunits) to the complex
(e.g., using nonlinear, multiple regression). Once the key drivers of
organizational performance have been identified, the management
accounting and control system should be modified to capture, monitor,
and report appropriate performance metrics for each driver.
3. Examples:
Example #1–Improving Sales and Safety Performance at American
Standard Companies (manufacturer): survey data were gathered from
more than 300 corporate locations.
Drivers of Sales Performance: By analyzing survey scores across
different units, the company was able to determine that the following
three HCM factors were most highly correlated with sales
performance: executive and supervisory skills (both of which were in
the “Leadership Practices” category), information sharing (in the
“Knowledge Accessibility” category), and innovation (in the
“Learning Capacity” category).
Drivers of Plant Safety Performance: A similar study revealed a
relationship between certain HCM practices and accident rates.
Safer plants excelled in three major areas: (1) supervisory skills (in
the “Leadership Practices” category), (2) information sharing (in the
“Knowledge Accessibility” category), and (3) supporting employee
skill development (in the “Learning Capacity” category).
Example #2–Improving Student Test Scores (public school system):
survey data in this case were collected from South Carolina’s Beaufort
County School District, which was realizing below-average scores on
state achievement tests taken by its students. The goal was to identify
and manage the HCM practices that had the most positive effect on
(mean) student performance scores. Cross-sectional data from various
school districts in the state indicated a positive relationship between total
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Chapter 19 – Strategic Performance Measurement—Investment Centers
survey (i.e., HCM) score and mean student performance scores. (For
example, the relationship between relative HCM scores and relative math
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scores is depicted by the graph presented on page 122 of the article).
Specific drivers of performance, uncovered during the statistical analysis
of results, included items such as teachers’ overall work culture, learning
culture, and the school‘s ability to reinforce and retain talent.
Example #3–Increasing Stock Returns in Financial Services Firms: the
authors collected total HCM survey scores from 11 different publicly
traded financial services firms and correlated these scores with one-year
ahead stock-market performance (total returns) of these firms. This
statistical analysis revealed a positive (though weak) positive association
between lagged HCM score and organizational performance (measured
by total stock-market return). The authors conclude (p. 122):”Financial
services firms with higher HCM scores in an initial assessment trended
toward higher stock-market returns a year later than firms with lower
HCM scores.”
Chapter 19 – Strategic Performance Measurement—Investment Centers
19-39 Research Assignment: Employee Wellness Programs;
Sustainability (60 minutes, including reading time)
1. On page 106 the authors define “workplace wellness” as “an organized,
employer-sponsored program that is designed to support employees
(and, sometimes, their families) as they adopt and sustain behaviors that
reduce health risks, improve quality of life, enhance personal
effectiveness, and benefit the organization’s bottom line.”
2. The following evidence regarding the ROI of employee wellness
programs is offered by the authors of the article:
a. For Johnson & Johnson, over the period 2002 to 2008, the ROI on
company estimates that every dollar invested in the intervention
program resulted in $6 of cost savings.
c. MD Anderson Cancer Center: cost savings associated with a
reduction in health-related lost days of work, $1.5 million; 50%
reduction in workers compensation premiums.
3. What do the authors of this article cite as important non-financial
performance indicators associated with corporate wellness programs?
a. J&J: reduction in number of employees that smoke, 2/3.
b. For the participants in the program referenced above in 2b, 57% of
those classified as “high-risk” (in terms of blood pressure, % body fat,
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Chapter 19 – Strategic Performance Measurement—Investment Centers
19-39 (Continued-1)
g. See “Dashboard for Workplace Wellness Programs” (p. 111) for one
comprehensive model for capturing key benefits, both to employees
and to the company.
4. Six pillars of a successful, strategically integrated wellness program:
1. Multilevel Leadership (i.e., engaged leadership at multi levels,
including C-suite [e.g., Johnson & Johnson, MD Anderson Cancer
Center], middle management, wellness program managers, and
creating a “culture of health.”
3. Scope, Relevance, and Quality—p. 106: “Wellness programs must
be comprehensive, engaging, and just plain excellent. Otherwise,
employees won’t participate.” Successful programs go beyond
physical fitness to address wellbeing factors such as stress and
programs and facilities.
5. Partnerships—both internal (e.g., with the Finance function, to vet
the financial returns to wellness programs) and external parties (e.g.,
local YMCA).
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Chapter 19 – Strategic Performance Measurement—Investment Centers
19-39 (Continued-2)
6. Varied and Creative Communication Platforms (e.g., use of
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Chapter 19 – Strategic Performance Measurement—Investment Centers
19-40 ROI and Sustainability; Internet-Based Research (60 minutes)
1. Alternative definitions are possible. In his book Making Sustainability
Work: Best Practices in Managing and Measuring Corporate Social,
Environmental, and Economic Impacts (San Francisco, CA: Berrett-
Koehler Publishers, Inc., 2008) Marc Epstein defines corporate
sustainability (p. 19) as the integration of corporate social,
environmental, and economic impacts into day-to-day management
decisions, and that (p. 23) “for sustainability, the goal is to
simultaneously achieve excellence in both social and environmental
and financial performance.” (emphasis in original)
2. This question is designed to motivate a connection in the student’s mind
between the “corporate sustainability” movement (or at least philosophy)
and the design of management accounting systems. Ideally, students
should mention topics covered elsewhere in the course, e.g., activity-
based costing (ABC), life-cycle costing, financial performance measures
for investment centers (ROI, RI, and EVA®), capital budgeting, the role
of non-financial performance indicators, and the Balanced Scorecard.
The instructor can make the point here that opportunities abound for
applying to new issues and challenges (e.g., corporate sustainability)
topical material learned elsewhere in the course.
Alternatively, or in conjunction with the above point, the instructor can
offer to students the following statement from Epstein (2008, p. 51),
which highlights a leading role that management accounting can play in
terms of supporting corporate sustainability programs and initiatives:
“An effective performance evaluation system (is needed) to integrate
economic, environmental, and social objectives and (to) reward the
contributions of individuals, facilities, and business units in meeting
those corporate goals.” Students should appreciate the fact that as
future leaders in the field they have an opportunity to participate in the
development of these systems.
3. Student answers (based on individual internet searchers conducted)
should differ. The purpose of this question is to motivate discussion
regarding the financial benefits of sustainability projects and programs,
which benefits can be impounded in traditional decision models such as
Chapter 19 – Strategic Performance Measurement—Investment Centers
19-40 (Continued-1)
a. financial benefits associated with product/process designs: reduction
b. revenue growth opportunities associated with enhanced image
c. improved regulatory environment (note that while any figure here
f. for other examples, please refer to the various Real-World Focus
(RWF) items in the chapter, as well as the HBR readings associated
with each of the following end-of-chapter assignments: 19-38, 19-39.
4. Again, student answers will differ here. The main point is to have
students think of a broader set of evaluation criteria—both financial and
non-financial in nature—in terms of evaluating corporate sustainability
projects and programs. Presented below is a set of sample responses.
a. risk (social, environmental, and political) reduction
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Chapter 19 – Strategic Performance Measurement—Investment Centers
19-40 (Continued-1)
e. listing on the Dow Jones Sustainability Group Indexes
(http://www.sustainability-index.com/), the FTSE4Good Index Series
(http://www.ftse.com/Indices/FTSE4Good_Index_Series/index.jsp),
MSCI ESG Indices, which (according the following website) “are
designed to help clients incorporate environmental, social and
governance (ESG) factors into their investment decisions”
(http://www.msci.com/products/indices/thematic/esg/), or the
AccountAbility ratings provided by AccountAbility
(http://www.accountability.org/) (these ratings are designed to
measure the extent to which companies have integrated sustainability
into their business practices—ratings are based on scores in six
categories: three external drivers (public disclosure, assurance, and
stakeholder engagement) and three internal drivers (governance,
strategic intent, and performance measurement).
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Chapter 19 – Strategic Performance Measurement—Investment Centers
19-41 Return on Investment (ROI); Residual Income (RI) (45 minutes)
1. The calculation of the unit contribution margin for Reigis Steel Division,
assuming 1,500,000 units were produced and sold during the year
ended November 30, 2016 is presented below.
Reigis Steel Division
Operating Statement
For the Year Ended November 30, 2016
($000 omitted)
Sales Revenue $36,000
Less Variable Costs
2. Calculations of selected performance measures for 2016 for Reigis Steel
Division are presented below
a. The pretax return on average investment in operating assets
employed is 13.16%, calculated as follows:
b. The calculation of residual income (RI) on the basis of average
operating assets employed is as follows:
RI = income from operations before taxes – minimum
required return on average assets
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Chapter 19 – Strategic Performance Measurement—Investment Centers
19-41 (continued)
3. The management of Reigis Steel would be more likely to accept the
contemplated capital acquisition if residual income (RI) were used as the
performance measure because the investment would increase both the
division’s residual income and management bonuses. Using residual
4. Reigis must be able to control all items related to profits and investment
if it is to be evaluated fairly as an investment center using either ROI or
residual income (RI) as a performance measure. Reigis must control all
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