L4 - Performance Measurements 2

Question 1

What are the two uses/ purposes of performance measures?

Answer 1

Informative use (inform decision-making)
Motivational use (influence behaviour)

Question 2

What types of measures/ targets are there?

Answer 2

Lagging vs Leading
Financial vs non-financial
Other dimensions (BSC)
Absolute and Relative
Input/Structural, Process, Result, Outcome (production model)

Question 3

Define a SMART target

Answer 3

1. Specific. Should target a specific area for improvement and be clear to people/unit being evaluated.
2. Measurable. Should be able to quantify and determine the degree of attainment.
3. Achievable/attainable. Should state what results can realistically be achieved within the operational constraints, e.g. resources, knowledge, timeframe (or assignable, i.e. specify who is responsible).
4. Relevant. Should be tied to priorities and/or strategy. (or realistic).
5. Time-bound. Should have a clear deadline expressed, specify when the results should be achieved.

Question 4

What are the two challenges when designing PMS?

Answer 4

1. Alignment between individual goals and organizational objectives (Kerr 1995)
2. Alignment between measures and organizational objectives (Ittner and Larcker 2003)

Question 5

What is the challenge in alining individual goals and organizational objectives (Kerr 1995)

Answer 5

Reward the types of behaviour that the rewarder is trying to discourage, while the desired behaviour is not rewarded at all (Kerr 1995)

Question 6

What is the challenge in alining measures and organizational objectives (Ittner and Larcker, 2003)

Answer 6

Little benefit from non-financial measures due to poor links between measures and strategic objectives (Ittner and Larcker 2003)

Question 7

Define box ticking when it comes to merasurements

Answer 7

box ticking: Doing an activity that is rewarded only because it is rewarded and not because it is necessarily needed or helpful at all

Question 7

Define Crowding out when it comes to merasurements

Answer 7

Excluding activities that are not rewarded

Question 8

Give some examples of rewarding A while hoping for B

Answer 8

Poor alignment between individual goals and organisational objectives
1. War – do the time and go home or win the war and go home. The behaviour of soldiers will differ depending on what the organization reward, i.e. doing the time or winning the war.
2. Medicine – doctors are more likely to pronounce patients sick when they are well (type 1 error) than to label a sick person well (type 2 error). Both are wrong but doctors are more likely to avoid type 2 errors because type 1 errors are rewarded by the general public and fellow physicians.
3. Universities – the organization reward research but at the same time the organization (and the society at large) expect good teaching.
4. Hope for long term growth and environmental responsibility but reward quarterly earnings.
5. Hope for teamwork but reward individual effort.
6. Hope for setting challenging objectives but reward achieving the goals

Question 9

What are the consequences of this behavior? (folly of rewarding A while hoping for B)

Answer 9

Low (or no) incentives for individuals to reach organizational objectives.

Question 10

What are four common mistakes when measuring non-financial performance? What is the consequence?
(Ittner & Lacker 2003)

Answer 10

1. Not linking measures to strategy
2. Not validating the links
3. Not setting the right performance targets
4. Measuring incorrectly

The consequence: Little (or no) help from non-financial measures to reach organisational objectives.

Question 11

What is important when measuring non-financial performance?

Answer 11

• Validity (Relevant)
  Does the measure capture what it is supposed to?
• Reliability (Measurable)
  Does the measure assess actual performance changes?
  ○ Good/bad outcome?
  ○ Reward/punish behaviour (not randomness)?

Many companies collect data before they decide what they want to find out (If you have enough data you can find correlations with everything)

Question 12

Two solutions for increasing the link between measures and strategic objectives and improving goal congruence on a individual and organisational level

Answer 12

• A rational/instrumental approach
• An approach combining management control with psychological theory (reducing the distance between management and employees)