NOTE: Free essay sample provided on this page should be used for references or sample purposes only. The sample essay is available to anyone, so any direct quoting without mentioning the source will be considered plagiarism by schools, colleges and universities that use plagiarism detection software. To get a completely brand-new, plagiarism-free essay, please use our essay writing service.
One click instant price quote
Performance Evaluation Because of the ongoing revolution in production techniques and marketing, evaluation processes emphasizing the relative performance of a decision maker in relation to previous periods or to other decision makers may induce irrelevant or dysfunctional choices. This is because traditional measures deal with the result of actual choices and do not reflect forgone alternatives. That is, the framework is restrained by ignoring opportunity cost. Furthermore, traditional analysis emphasize short-term choice behavior rather than long-term strategies and sustained wealth growth.
a manager's choice behavior is driven by his or her own welfare function. It has long been recognized that individuals in their roles as employees have personal goals that may interface somewhat imperfectly with organizational goals and that such incongruity may affect choices. This can result in decision making that may not be rational from the point of view of the firm. Because the goals of managers and owners may diverge, a well defined incentive system is imperative to induce management choices that are consistent with the firm's success. To help assure goal congruency, an incentive system should rely on a measurement scale that can be shared by both owners and managers to appraise their wealth and welfare. Thus, an important role of a measurement system is relating the internal activities of the firm to the external environment that affects owners' wealth.
To harmonize these divergent goals, it is important that the relationships between the various objectives be measured in a common unit - in the same measurement scale. Hence, the performance evaluation process depends heavily on financial measures because most business assessments are based on such data. Even when partially long-term, resource-based indicators are used (e. g. , ROI), the terms are so broadly defined that signals lose the specificity required for appropriate representations of the state of objectives. ROI is just a partial measure of long-term phenomena because only operating assets are considered in constructing the measure. Neglecting managers' choices with respect to such variables as the use of credit and the effects of cost allocation techniques hinders the reliability and meaningfulness of ROI as a measure.
Furthermore, the non additive aspect of some of the items included in the base of ROI causes concern about the choices induced by such a measure. For example, measuring the investment base in terms of historical cost and combining the costs in the base across time is a questionable practice. Dividing current profit numbers by the investment base is an ambiguous relation unless two conditions are satisfied. First, the investment base must be expressed in terms of the current or replacement value if ROI is to indicate a relationship between current profits and the resources employed in generating such returns. Second, because balance sheet measures represent the amount of resources and claims at a particular point in time, such measures must be weighted across time to be compatible with income statement measures that track the flow of resources in and out of an entity over time. Another concern in performance evaluation is lack of firm-specific characteristics when using industry averages.
Because a firm's success within an industry is significantly influenced by the company's comparative advantages in the marketplace, performance measurements should emphasize indicators that differentiate operations of the firm as well as those comparable with average industry indicators.
Free research essays on topics related to: measures, roi, incentive system, choices, long term
Research essay sample on Long Term Incentive System
