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CHAPTER 14
PERFORMANCE MEASUREMENT, BALANCED
SCORECARDS, AND
PERFORMANCE REWARDS
QUESTIONS
1. A mission statement expresses the organization’s purposes and identifies how the
organization will meet its customers’ needs through its products or services. Alter-
izational importance so that employees can internalize these beliefs and values.
2. Performance measurement is necessary to gauge whether a firm is pursuing its
goals and objectives successfully. Without performance measurement systems,
Performance measures should be both qualitative and quantitative. The measures
chosen must be reasonable proxies for the organization’s critical success factors,
In the absence of benchmarks, the performance measurements will not be mean-
historical performance measurements.
3. It is expected that people will act specifically in accordance with how they are meas-
ment of the measures by which their performance is assessed are more likely to ac-
influence the measures.
4. In selecting bases for performance measurement, managers should consider:
whether the measures capture progress toward organizational goals,
the input of those being evaluated,
those being evaluated, and
methods to provide appropriate feedback on performance.
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The traditional performance evaluation measures for cost centers are standard cost
variances. Traditional measures for revenue centers are deviations from budgeted
need to be evaluated based on their profitability relative to the value of assets
used. Profit centers have no responsibility for assets and can be evaluated based
on profit alone.
horizon of decisions made by the manager.
5. Conceptually, net cash flow from operations measures the same thing as net in-
come.
tive accounting measures. However, it is not beyond manipulation because cash
flow can be affected to some extent by adjusting the timing of cash receipts and
ard for the other measure.
The most significant weakness of net cash flow from operations is that it, like ac-
tives.
6. In defining “income,” managers have several major concerns that need to be ad-
dressed:
Manipulation is an important concern because performance measures should be
in this respect because external measures cannot be internally manipulated.
7. Residual income (RI) is a derivative of return on investment (ROI). In many ways,
the relationship between RI and ROI is parallel to the relationship between net
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substantially across company divisions.
Economic value added (EVA®) is similar to RI. The major distinction is that EVA
sarily the cost of capital. EVA is conceptually similar to RI in its computations but
utilizes a market measure of asset value and applies a target return rate that re-
8. By linking managerial rewards to performance, the welfare of managers is linked
to their success in achieving organizational goals and objectives. Because a firm’s
The performance measurement and reward strategy for each managerial level
of control. Also, managers at higher levels are required to be more long-term ori-
ented and managers at lower levels are required to be more short-term oriented.
9. The balanced scorecard (BSC) is a conceptual approach to measuring performance
that weighs performance from four perspectives. Managers choosing to apply the
BSC are demonstrating a belief that traditional financial performance measures
alone are insufficient to assess how the firm is doing and what specific actions
10. The benefit of including sustainability into a BSC is that the organization can visual-
ize how the concept affects its short-term and long-term viability. Inclusion also em-
phasizes the importance of sustainability in the organization’s goals and objectives.
By showing performance measurements relative to sustainability in the BSC, the val-
11. To remain competitive, there has been a shift in American industry toward perfor-
mance-based compensation for two reasons. First, workers are becoming removed
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organization to be successful.
12. The outcome is suboptimization. When performance measures and rewards of the
correlated with the organization’s and segment’s goals, achievement of the indi-
13. There must be consistency between the time perspective of the reward system and
sult because achievement of performance targets will not necessarily result in
14. If the organizational mission of each subunit is unique, the performance measures
of each subunit should also be unique. For example, if one subunit has a build
Financial performance measures are more appropriate for short-term performance
measurement. To measure long-term performance, the better measures are often
indicator of long-term performance.
The time horizon of the performance measures is linked to the subunit mission.
short term for harvest missions.
15. Feedback is critical to improving performance. Negative or critical feedback pro-
the reward system and (2) take action to improve future performance.
16. When employees hold stock, they have personal incentives to act in the best interest
of the stockholders. By providing employees with stock, managers are creating a nat-
If managers are also shareholders, there is a natural consistency between their actions
as managers and their actions as shareholders. This situation is not necessarily true
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maximization.
17. Equity in the reward structure must be maintained throughout the organization.
Equity requires consideration of the relative pay of top managers versus lower-
A consideration of equity also requires that the reward system be sensitive to local
differences (including living costs and tax effects) in global organizations. Cur-
motivated.
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EXERCISES
18. The new division will have a mission of “build.” When the new division is estab-
lished, it will have only a potential customer base but no existing sales. Accord-
outset for this new division should promote growth. Later in the life cycle, perfor-
mance measurements will be added or deleted to shift the focus to generation of cash
Percentage of existing clients that have video game installations. The empha-
sis would be on measuring the annual growth in this number.
els of sales generated.
Percentage of clients who have received sales calls providing information on
the services available from the new division. As an early life-cycle perfor-
measure but emphasizes personal contact.
Sales and promotions budget. A key device to increasing market share will be
the appropriate use of advertising and promotions. Budgets can be prepared
hensive and internally consistent marketing strategy.
19. No solution provided. Each student will have a different answer.
22. To survive, firms need to manage effectively for both long–term survival and short-
term profitability, which are separate managerial concerns. Long–term survival is re-
agement of resources (such as current assets) over the near term.
ments relative to time horizons forces managers to consider both short-term and long–
term consequences of decisions made.
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23. Division 1: $ 320,000 ÷ $ 2,700,000 = 11.9%
24. a. Asset turnover = Sales ÷ Average assets
5 = $3,950,000 ÷ Average assets
b. Profit margin = Segment margin ÷ Sales
0.06 = Segment margin ÷ $3,950,000
25. a. ROI = Income ÷ Assets invested
b. Profit margin = Income ÷ Sales
c. Asset turnover = Sales ÷ Assets invested
d. ROI = Asset turnover × Profit margin
e. RI = Income – (Target rate × Asset base)
26. Revenue
$ 28,000,000
Expenses
(26,500,000)
Income
$ 1,500,000
Target return (0.12 × $14,200,000)
(1,704,000)
Residual income
$ (204,000)
27. a.
Division 1
Sales
$ 5,200,000
$1,850,000
Variable costs
(2,630,000)
(330,000)
Fixed costs
(490,000)
(840,000)
Income
$ 2,080,000
$ 680,000
Target return:
$7,180,000 × 0.13
(933,400)
$875,000 × 0.13
(113,750)
Residual income
$ 1,146,600
$ 566,250
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According to the residual income measure, Division 1 outperformed Division 2.
b.
Division 1
Division 2
Sales
$ 6,240,000
$2,220,000
Variable costs
(3,156,000)
(396,000)
Fixed costs
(490,000)
(840,000)
Income
$ 2,594,000
$ 984,000
Target return:
$7,180,000 × 0.13
(933,400)
$875,000 × 0.13
(113,750)
Residual income
$ 1,660,600
$ 870,250
the percentage increase in residual income in Division 1 was merely 44.8 per-
cent.
c. Division 2 has more operating leverage (relatively more fixed costs than Divi-
28. a. Income = Sales Variable costs Fixed costs
ROI = Income ÷ Assets invested
b.
Income
$14,700,000
Target return (0.18 × $25,000,000)
(4,500,000)
Residual income
$10,200,000
c. Profit margin = Income ÷ Sales
d. Asset turnover = Sales ÷ Assets invested
29. a. EVA = After-tax income – (Cost of capital FMV of capital)
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30. a. EVA = After-tax income – (Cost of capital × FMV of capital)
One would start by determining the amount of capital invested in the entire
Next, the firm’s total market value must be divided among the operating divisions.
This step will involve some judgment. One approach is to allocate market value to
the divisions based on relative book value of assets. A second approach is to estab-
lish the value of divisions by determining the value of independent companies op-
31.
Asset Turnover
Profit Margin
ROI
RI
a.
N
I
I
I
b.
D
I
?
?
c.
I
D
?
?
d.
I
D
I
D*
e.
D**
I
?
?
f.
N
N
N
I
g.
I
D
I
I
h.
I
?
?
?
32. a. MCE = Value-added time ÷ Total time
b. Process productivity = Total units ÷ Value-added time
= 700,000 ÷ 742,040
= 94.3% (rounded)
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d. Throughput = Good units ÷ Total time
e. Throughput = MCE × PP × PQY
33. a. MCE = Value-added time ÷ Total time
b. Process productivity = Total units ÷ Value-added time
c. Process quality yield = Good units ÷ Total units
d. Throughput = Good units ÷ Total time
ment concepts, or investing in prevention costs of quality.
34. a. MCE = Value-added time ÷ Total time
b. Process productivity = Total units ÷ Value-added time
c. Process quality yield = Good units ÷ Total units
d. Throughput = Good units ÷ Total time
tracts.