lec 9 (stud)
TRANSCRIPT
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Organisational Behaviourand Effective Reward
SystemsLecture 9
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Learning Objectives
Define the use of performancemeasurement systems withinorganisations
Identify deficiencies in conventionalperformance measurement and lookat contemporary efforts
Identify characteristics of goodperformance measurement systems
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Performance MeasurementSystems
Measure performance of areas of thebusiness and individuals by comparingperformance with a target
Essential part of the planning andcontrol process
Go beyond the measurement offinancial performance
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Purposes of PerformanceMeasurement
To communicate the strategy and plansof the business and align employeesgoals
To track performance against targets
To identify problem areas
To evaluate emplyees performance and
as a basis for rewards
To guide managers in developing futurestrategies and operations
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Conventional PerformanceMeasurement
CorporateDivisions
DivisionsPlants
DepartmentsProductions processes
Work teams
Responsibility Centre
Investment Centre
Profit Centre
Revenue CentreCost Centre
Performance Measure
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Return on Investment (ROI)
ROI is a financial measure of the performanceof an investment centre
Considers both the profit and the capital
invested Measure of how effectively each investment
centre used its invested capital (averageoperating assets) to earn a profit
ROI = profit .
avg op. assets
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Return on Investment
Improving ROI
Increase either or both components of ROI
Increase return on sales by increasing
selling price or sales revenue, or decreasingexpenses
Increase investment turnover by increasingsales revenue or reducing invested capital
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Advantages of ROI
Encourages managers to focus on both profitand the capital invested to earn that profit
Can be used to evaluate the relativeperformance of investment centres
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Limitations of ROI
Can encourage managers to focus on short-term financial performance, at the expense ofthe long-term
Can encourage managers to defer assetreplacement
May discourage managers from investing inprojects which are acceptable from theorganisations point of view, but decrease the
investment centres ROI
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Residual Income
RI is the amount of profit remaining aftersubtracting the imputed interest charge
Promotes goal congruence
Takes account of the organisationsrequired rate of return in measuringperformance
Encourages investment in projects whichyield a positive residual income
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Limitations of Residual Income
RI is a dollar measure and thus cannot beused to assess relative performance ofdifferent-sized businesses
Can encourage short-term orientation
The measure for profit and invested capital(asset base) chosen may affect behaviour
Need to be clearly defined and consistent across anorganisation
Use the profit margin attributable to theinvestment centre (to evaluate the viability of thecentre)
Consider responsibility and controllability ofmanager when determining the asset base
(average assets)
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Measures of Shareholder Value
Improving the worth of thebusiness from the shareholdersperspective
Value-based management - usingshareholder value analysis tomanage a business
Need to understand the value drivers(activities or actions that createvalue)
Need to consider strategy, finance
and corporate governance
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Measures of Shareholder Value
Several measures can be used
Economic Value Added (EVA)
EVA = NOPAT (avg. op. assets x WACC)
Market Value Added (MVA)
MVA = MV of company BV of company
Shareholder Value Added (SVA)
SVA = Corporate value MV of debt
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Conventional PerformanceMeasurement
Measures focus on profit and itscomponents (revenue and costs)
Profit important for owners,financial markets, and creditorsand therefore important tomanagers
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Problems with ConventionalPerformance Measures
They are not actionable Describe consequences, not causes
Emphasise only one perspective of
performance Do not allow assessment of performance
across all strategically important areas
Provide limited guidance for future
actions Report only on the immediate financial
outcomes of actions and decisions
May encourage actions that decreaseboth customer and shareholder value
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Contemporary PerformanceMeasurement Systems
Non-financial and financial measures
Non-financial measures have not alwaysbeen part of the formal performance
measurement system. Strategic orientation
Selected to directly measure areas thatprovide a competitive advantage andincrease value.
External benchmarks
Continuous improvement
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Advantages ofNon-Financial Measures
Examples
Reflect the drivers of future financial
performanceMore actionable
More understandable, easier to relateto
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Problems withNon-Financial Measures
Wide choice of non-financial measuresavailable
Development can be ad-hoc and
undirected
Trade-offs must be made
May lack integrity
May not easily translate into financialoutcomes
W i Si f I d t
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Warning Signs of an InadequatePerformance Measurement
System Performance is acceptable on alldimensions, except profit
Customers do not buy, even when prices
are competitive No one notices when performance reports
are not supplied
Significant time is spent debating themeanings of measures
The measures have not changed for sometime
The business strategy has changed
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Characteristics of GoodPerformance Measurement Systems
Link to strategy and goals of theorganisation
Be simple
Recognise controllability
Emphasise the positive
Be timely
Include benchmarking Embrace participation and empowerment
Include only a few performance measures
Link to rewards
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Designing Measures forContinuous Improvement
Selecting relevant performancemeasures
Performance measures should be changed
to reflect changes in the businessDefining and redefining the measure
Development of new measures
Making the performance target morechallenging
Increase difficulty over time
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Behavioural Implications ofChanging Performance Measures
Performance measurement undertakento encourage goal-congruent behaviour
Resistance to change
Rewards linked to achievable targets
Support across the entire organisation
Bottom-up approach used to identify
measures
Treated as part of a comprehensivesystem, not an add-on
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Behaviour Implications
Main objectives of a reward systeminclude:
To attract qualified employees
To motivate employees to achieve highlevel of performance
To create an enjoyable workplace that
will ensure employees return
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Intrinsic and Extrinsic Rewards
Intrinsic Extrinsic
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Reward Preferences
Below are a list of rewards:
Pay, bonuses and other pay incentives, Time off,Flexible working hours, Advancement and promotionopportunities, Recognition from supervisor, peers, etc,Ownership or profit-sharing, Autonomy, Personal
challenge and growth, Enjoyment at work, Socialsupport and friends, Job security, Interesting andchallenging work
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References
Ivancevich, J.M., Konopaske, R.,Matteson, M.T. (2011). Evaluation,Feedback and Rewards.
Organisational Behaviour andManagement (9 ed.)
Langfield-Smith, Thorne & Hilton.
(2010). Management Accounting:Information for Creating andManaging Value. Australia: McGrawHill.