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Performance Measurement Notes

Accounting Notes > Managerial Accounting (AC211) Notes

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MODULE 4: PERFORMANCE MEASUREMENT Lecture 1 - The Behavioural Effects of Performance Measurement READING 1: Realising the richness of psychology theory in contingency-based management accounting research (Hall, 2015) Understanding the Effects of MA Practices at the Individual Level of Analysis

* Intervening Variable Model: MA Variable - Psychological Variable - Individual Level Outcome e.g. Participative Budgeting - Role Ambiguity - Job Performance

* Moderating Variable Model: How much MA variable affects individual-level outcome is conditional on value psychological variable e.g. how participative budgeting influences managerial performance is condition on manager's perceived locus of control

* Argys (1953) - How budget related to employees' motivation and social relations (focused on pressure, stress and tension created by budgets in PM)

* Stedry (1960) - How budget goal difficulty and timing interact to influence performance

* Hopwood (1974) - Examined effects of different styles of use of accounting information in performance evaluation of cost centre managers i.e. evaluated under budget constrained style - report higher tensions, poor relations, more likely to falsify information etc.

* Otley (1978) - Contrasting conclusions to Hopwood; budget-constrained style of performance not associated with higher levels of job tension or lower levels of role ambiguity; differences could be related to types of organisations - encourage studies of different contingency variables (culture, environment, strategy etc.)

* Giraud et al (2008) - Used justice theory to propose presence of uncontrollable items in a manager's performance assessment generates perceptions that the evaluation process is unfair as it violates principles of equity

* Burkert et al (2011) - Application of controllability principle negatively associated with role ambiguity and role conflict

* Beyond budgeting used psychology theories to inform understanding of how and why performance measurement systems influence behaviour

* More recent research has attempted to trace psychological states through which management accounting practices are expect to influence individual behaviours Understanding the Effects of MA Practices at the Organisational Level of Analysis

* Examine organisational performance as dependent variable

* Govindarajan & Gupta (1985) - Examine relations between strategic business unit strategy, reliance on accounting performance measures and strategic business unit effectiveness

* Perera et al. (1997) - Increasing use of non-financial performance measures is associated with enhanced performance for firms pursuing customer-focus in manufacturing strategy

* Drawn on psychological processes to examine links between more contemporary business process and management accounting practices

* Some studies draw explicitly on psychology theory to generate expectations (e.g. Widener (2006) drew on equity theory to motivate expectations about the effect of hierarchical vs egalitarian pay structures)

READING 2: Inside Amazon - Wrestling Big Ideas in a Bruising Workplace (Kantor &
Streitfeld, 2015)

* Amazon's singular way of working

* Guided by leadership principles - 14 rules inscribed on laminate cards (e.g. bias for action, hire and develop the best, dive deep, thinking big)

* Workers encourage to tear apart other's ideas, toil long and late, held to standards that the company boasts are 'unreasonably high'

* Internal phone directory instructs colleagues on how to send secret feedback - used to sabotage others e.g. sample text 'I felt concern about his inflexibility' etc.

* 'Purposeful Darwinism' - losers leave or are fired in annual cullings of staff; workers suffering from cancer/miscarriages claimed to have been evaluated unfairly/edged out rather than given time to recover

* Very high pressure - 'nearly every person I worked with, I saw cry at their desk'

* Very private - 'even low-level employees sign a length confidentiality agreement'

* Some employees thrive in the high pressure environment as it 'pushed them past what they though were their limits'; some employees motivated by 'thinking big and knowing that we haven't scratched the surface on what's out there to invent'

* Amazon may just be quicker in responding to changed that the rest of the work world is now experiencing - continuous data measurement

* Conflict brings about innovation A Philosophy of Work

* Bezos prioritised data-driven management very early

* Built Amazon on impulses of: (1) Eagerness to tell others how to behave (2) Instinct for bluntness bordering on confrontation (3) Overarching confidence in power of metrics

* Employees told to be frugal, focus on striving to please customers - 'customer obsession'

* Encouraged to 'disagree and commit' - rip into each others ideas, feedback that can be blunt to the point of painful - ensures you reach the right answer

* Notion of meritocracy - 'even relatively junior employees can make major contributions' Motivating the 'Amabots'

* 'If you're a good Amazonian, you become an Amabot' - you have become on with the system - drive employees to drive themselves

* Company runs on continual performance improvement algorithm of its staff

* Amazon links individual performance to success of assigned projects

* Some felt protected from pressures by nurturing bosses, but others said culture stoked willingness to erode work-life boundaries, castigate themselves for shortcoming etc.

* Amazon possesses more data than any retail operations in history - perpetual flow of real-time, ultra-detailed metrics to measure everything customers do

* Employees held accountable for many metrics during 'business reviews'

* Employees talk about how work is never done/good enough - 'Amazon is where overachievers go to feel bad about themselves' A Running Competition

* Anytime Feedback Tool - widget that allows employees to send praise or criticism about colleagues to management

* Team members ranked, those at the bottom eliminated - encourage employees to make pacts with colleagues to bury the same person or praise each other

* Competition can lead to resource hoarding e.g. to get new team members 'drown someone in the deep end of the pool' then take their subordinates

* Organisational Level Review - managers debate subordinates' rankings, assigning and reassigning names to boxes in matrix project on the wall When 'All' Isn't Good Enough

* Multiple accounts of employees being put on 'performance improvement plans' during personal crises (e.g. miscarriages, family illness etc.) A Stream of Departures

* Retains workers by requiring them to return portion of signing bonus if they leave within a year and a portion of their relocation fees if they leave within two

* Several fathers left due to pressure from bosses to spend less time with their families

* Reputation for high attrition; Amazon claims misleading - attributes it to robust hiring

* Other business sometimes cautious to hire previous Amazon employees as have a reputation for being pugnacious and work-obsessed

* Bezos envisioned new type of work place - 'fluid but tough, with employees staying only a short time and employers demanding the maximum'

* Culture will only change if data indicates it needs to - 'when the entire way of hiring and working and firing stops making economic sense'

READING 3: Dysfunctional Consequences of Performance Measurement (Ridgway, 1956)

* Tendency to state numerically as many as possible of the variable with which management must deal with - allows statistical decision making, LP etc.

* Idea that if progress towards goal can be measured, resources can be better managed

* Research indicates that over-reliance on quantitative measures comes from insufficient knowledge of full effects & consequences - side effects which may outweigh benefits Single Criteria

* One quantity measures & observed (e.g. total output, profit)

* Public Employment Agency Case Study (Blau):
- Employment interviewers appraised by number of interviews conducted - motivated to complete interviews not spend time locating jobs for clients
- Organisations goal of placing clients not given primary consideration

* Federal Law Enforcement Agency Case Study (Blau):
- Investigators given quota of 8 cases per month - towards end of the month investigators who have no met quote prioritise quick cases over urgent ones
- Existence of 'accounting period' adversely affects over-all goal accomplishment

* Soviet Management Case Study (Granick):
- How attention & glory that accrues to plant managers when they set a new monthly production record in one month can lead to neglect of repairs & maintenance

* Standard costs frequent source of dissatisfaction - considerable time & energy expended in discussion/debate about the correctness of charges - 'wooden money' savings i.e. transferred from one departments to another with no change in company profit

* Two measures rejected as appropriate overall measures: (1) Cost-Reduction Per Unit - does not provide basis for evaluating new products (2) Profitability - affected by SR factors outside managements control e.g. shortages

* Soviets concluded by 1940 that no single measure of success of a firm is adequate Multiple Measurements

* Rejection of single measure leads organisations to use multiple i.e. several quantities measured simultaneously (e.g. output, quality, cost etc.)

* Public Employment Agency Case Study (Blau):
- Realisation that job referrals/placements were also important led firm to stress qualitative aspects of interviewer's jobs
- 8 quantities that were counted/calculated for each interviewers; several ratios (referrals to interviews, placements to interviews, placements to referrals etc.)

* Soviet Management Case Study (Granick):
- Ranking of importance of multiple criteria
- Typical interfirm competition, judges provided long list of indexes however no indication of how these indexes should be weighted given
- Presence of 'campaigns'/'priorities' stressing specific factors helped management decide which elements are most important, but without over-all composite measures, impossible to determine whether temporary increased effort of 'campaign' criteria represents new efforts or effort shifted from other criteria
- Possibility that managers refused difficult orders as it would mean failure to produce planned quantities, despite being profitable (production quantity > profitability)

* Use of multiple measures assumes individuals will commit efforts to areas which contribute greatest improvement to overall measurement - however situation must exist where additional unit of effort regardless of where applied would yield equally desirable results - individual must employ judgement 'balanced stress on objectives'

Composites

* To adequately balance stress on contradictory objectives, there must be implied or explicit weight of criteria - can easily combine measures for overall performance

* Can be disagreement on validity of weight system employed

* Air Force Case Study (Wagner):
- Complex rating scheme covering wide range of activities
- When employees put under pressure to raise composite score, observable unanticipated consequences as pressure to increase performance on one criterion relieved by slackening effort on another
- Results in tension, role and value conflicts, reduced morale etc - primarily seen when goal increased without corresponding increase in means

* Ratchet Principle: Increase in performance became new standard and then standard is continuously raised - agreement between workers to not exceed quota

* Lack of examples but clear indication that composites can have adverse consequences Conclusion

* Quantitative PM can have undesirable effects for overall organisation performance

* Motivation and behavioural consequences of PM are inadequately understood

* Further research needed to better understand how behaviour may be oriented toward optimum accomplishment of organisation's goals

Lecture 2 - Financial & Non-Financial Measures READING 1: The Future of PM: Measuring Knowledge Work (Austin & Larkey, 2008) Introduction

* Organisations' abilities to create/retain/communicate/use knowledge are vital to success

* Shift towards knowledge work made relationship between organisation's measured resources and market success weaker - core competencies, distinctive abilities of employees not listed on balance sheets

* Distinctive characteristics of knowledge work: (1) Less observable than physical work (2) Motivation of knowledge workers more intrinsic than it is for many physical workers (3) High degree of individual capability in worker is critical factor in achieving successful outcomes, rather than consistent compliance with a plan/efficient participation i.e. talent, skill, knowledge (TASK) differentials matter a lot Problem of Observability

* R-H Model (Ross-Holstrom):
- Simplifies firm into 2 individuals: a principal (has resources to hire an agent) and an agent (ability to transfer resources into output)
- Principal wants to maximise profit (monetary value of output - payment required)
- Agent want to maximise income, while minimising effort & risk
- Assumes principal cannot observe agent - justified as often infeasible for manager to watch every employee/workers hired for abilities manager does not possess
- Principal cannot compensate agent on basis of effort as its unobservable, but can compensate based on 'signal' of agents effort level (but includes random component correlate to agents efforts - not directly but statistically indicative of performance)
- Optimal compensation schedule derived form setup, producing following conclusions: (1) Agent demands additional compensation for bearing probabilistic risk associated with signal of his performance (2) Outcome is Pareto inferior - both would be collectively better off if effort were directly observable (economic value lost due to risk) (3) Compensation will include variable component which increases with signal

* Banker & Datar (1989): Broadened discussion to include problems of precision and sensitivity of stochastic signal
- Precision: degree to which movement in signal indicates movement in underlying quantity of interest (e.g. effort) rather than random disturbance
- Sensitivity: Degree to which a change in an underlying quantity of interest (e.g. effort) tends to change an available measurement indicator

* Public Employment Agency Case Study (Blau, 1963) - Dysfunction:
- Well-intended organisational measurement programs consistently dysfunction
- Focused on interviewing, rather than job placements; realised system was dysfunction - expanded PM to include 8 measures (including ratio)
- Dysfunctional behaviours replaced with more sophisticated dysfunction behaviours e.g. 'outright falsification' by destroying interview slips that did not lead to referrals
- Dysfunction has 3 characteristics: (1) Inherent in attempt to measure organisational activity (2) Persistent - resistant to efforts to eradicate by adjusting measurement (3) Invariable hidden from designers and users of measurement system until failure
- Often explained by incompleteness (measure doesn't capture all critical dimensions)
- modified models to address problem e.g. Holmstrom & Milgrom (1991) - employ agent at flat fee to deal with incomplete measures but imposes constraint on incentive compensation formulas

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