Performance Evaluation: Methods and their qualities
Bachelor Thesis from the year 2008 in the subject Business economics - Controlling, grade: 9 out of 10, Maastricht University (Faculty of economics and business administration), 24 entries in the bibliography, language: English, abstract: Performance evaluation is a topic of ongoing concern, interest and controversy. While the main goal of performance measurement is to provide a basis for the assessment of employee’s objective achievement it also helps to develop strategic plans and when properly designed it gives the motivation to work towards goals that are aligned with the principals residual interests (Ittner & Larcker, 1998). However, this incentive alignment is subject to major discussion. For example Josef Ackermann (2008), CEO of Deutsche Bank, admitted that one reason for the development of the sub prime crisis was the bonus system among banks. He argued that bonuses should establish the right incentives and be oriented towards medium- and long-term goals. He assessed tying bonuses to maximize profits in the short term – which encourages managers to take high risks – as the wrong approach. The question is therefore, which kind of measurement techniques can be used to reflect the subordinate’s incremental contribution to the firm value and how they can be designed to serve the principals’ goals. The paper is organized as follows. The first part provides an overview of performance evaluation in general followed by the main part about objective and subjective performance measures, their benefits and shortcomings. Before concluding, the balanced scorecard – a tool for performance evaluation that combines both financial and operational measures – is analyzed and described. [...]
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4.1 Advantages Accounting based performance accounting numbers actions and decisions Advantages of objective agency theory agent agent’s actions argue balanced scorecard bias bonuses Bushman CEO compensation Combined evaluation tool combines both financial company’s compressed performance ratings considered incomplete customer satisfaction discussed employee’s action evaluation measures evaluation period ex favoritism Feltham & Xie financial measures financial performance measures future financial performance Gibbs Gibbs et al gives an overview growth opportunities Hemmer implementation incentive alignment incentive contracts incentive plan intangible assets intellectual capital Ittner & Larcker Ittner et al Kaplan & Norton Krishnan main drivers manager’s measures and stock measures Ittner Moers non-financial measures objective and subjective Objective evaluation tools objective measurement tools operational measures optimal weighting principal principal’s interest risk short-term shortcomings of objective stock returns subjective evaluation subjective measures leads Subjective performance evaluation subjective performance measures subordinates supervisors taking the long-term target traditional measures value creation