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Lecture

Chapter 11 Notes

2 Pages
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Department
Financial Accounting
Course Code
MGAD40H3
Professor
Prof.Jan Klakurka

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Chapter 11 – Aligning Performance Goals and Incentives
-Successful strategy implementation requires communicating strategic choices to hundreds or thousands of employees.
-Each employee requires guidance about how they can contribute, and performance goals provide that guidance.
-A goal is a formal aspiration that defines purpose or expected levels of achievement. Goals specify the ends that managers wish to achieve, and the means
by which to achieve them.
Goals, Objectives, and Targets
-Goalsrelate to general aspirations
-Objectives or targetsmore specific. They incorporate measurement standards and time frames against which to gauge progress and success
-Goals and objectives can be made actionable only when measurement is attached to any set of aspirations.
-Performance goal denotes a desired level of accomplishment against which actual results can be measured
Purpose of Performance Goals
-Without the clarity of performance goals, employees may choose very different ways of generating financial returns
-Performance goals and measures allow systematic and clear communication of what managers need to focus on. The unambiguous per formance goals
frees up top management attention to focus on other things, allowing high ROM.
Critical Performance Variables
-Two steps in determining critical performance variables: (1) work deductively to identify potentially important performance drivers (variables that either
influence the probability of successfully implementing the strategy, or provide the largest potential for marginal gain over time), (2) identify the critical
performance variables from among this list of perfor mance drivers.
Selecting Performance Measures
-A measure is a quantitative value that can be scaled and used for purposes of comparison
-Performance measures may be financial or nonfinancial. Financial measures are stated in monetary terms, nonfinancial measures are quantitative data
created outside the formal accounting system.
-To determine if a measure is suitable to support a performance goal, it must be subjected to 3 tests:
1. Does it align with Strategy?
2. Can it be Measured Effec tively?
Measures should be objective, complete and responsive. Objective measures can be independently measured and verified. Complete measure captures all
the relevant attributes of achievement. A responsive measure reflects actiosn that a manager can directly inf luence.
3. Is the Measure Linked to Value?
Inputs Process Outputs. Leading indicators of success, and lagging indicators of success. Input indicators and process indicators are leading
indicators.
How Many Measures for Each Employee?
-Effective managers provide focus and impact by insisting that individuals be accountable for no more performance measures than they can recall from
memory
-Managers should assign no more than seven to nine performance goals to any single individual.
Setting the Performance Bar
-Managers must choose the target or desired level of achievement. If failure to meet these performance goals could jeopardize the successful
implementation of the strategy, then there is little choice about the right level
-Factors to consider when setting performance goals
1. Benchmark Comparisons
Find the firm that set the standard for the most effective utilization of resources, then calibrate their own efforts against it. Business with multiple
productions could also benchmark best internal practices across units.
2. Motivating Effor tLevel of Difficulty: Challenging
3. Motivating Effor tDeciding Who Should Participate in Setting Goals
Depends on managers belief of where the relevant information is located in the organization. If information needed to set performance goals are widely
dispersed throughout the organization, then a participative style is appropriate. If information is held up top, little consultation is needed.
Multiple Purposes of Perfor mance Goals
-Used for motivation, planning and coordination, early warning, and evalutation
-Performance goals are important for planning and coordination to ensure (1) adequate levels of resources and (2) workf low coordination among
interdependent units
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Description
Chapter 11 Aligning Performance Goals and Incentives - Successful strategy implementation requires communicating strategic choices to hundreds or thousands of employees. - Each employee requires guidance about how they can contribute, and performance goals provide that guidance. - A goal is a formal aspiration that defines purpose or expected levels of achievement. Goals specify the ends that managers wish to achieve, and the means by which to achieve them. Goals, Objectives, and Targets - Goals relate to general aspirations - Objectives or targets more specific. They incorporate measurement standards and time frames against which to gauge progress and success - Goals and objectives can be made actionable only when measurement is attached to any set of aspirations. - Performance goal denotes a desired level of accomplishment against which actual results can be measured Purpose of Performance Goals - Without the clarity of performance goals, employees may choose very different ways of generating financial returns - Performance goals and measures allow systematic and clear communication of what managers need to focus on. The unambiguous performance goals frees up top management attention to focus on other things, allowing high ROM. Critical Performance Variables - Two steps in determining critical performance variables: (1) work deductively to identify potentially important performance drivers (variables that either influence the probability of successfully implementing the strategy, or provide the largest potential for marginal gain over time), (2) identify the critical performance variables from among this list of performance drivers. Selecting Performance Measures - A measure is a quantitative value that can be scaled and used for purposes of comparison - Performance measures may be financial or nonfinancial. Financial measures are stated in monetary terms, nonfinancial measures are quantitative data created outside the formal accounting system. - To determine if a measure is suitable to support a performance goal, it must be subjected to 3 tests: 1. Does it align with Strategy? 2. Can it be
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