Cost Management: Measuring, Monitoring, and Motivating Performance, 2nd Edition

CHAPTER 15

Performance Evaluation and Compensation

In Brief

When owners give managers authority to make decisions and guide operations, problems arise because owners' and managers' interests often conflict. Owners use accounting information to measure performance, monitor managers' actions, and motivate decisions that are in the owners' interest. Similarly, managers use accounting information to measure, monitor, and motivate the actions of employees. Before managers or other employees can be held accountable for the results of their decisions and actions, their rights and responsibilities need to be defined. Then return on investment, residual income, economic value added, or other measures can be used to gauge and reward performance. In large organizations, resources may be transferred internally from one department to another. The prices set for these transfers affect financial measures of performance. When these transfer prices are set appropriately, managers have incentives to increase the value of the overall organization. However, transfer prices can encourage suboptimal decisions that may be beneficial at the local level, but are not in the best interest of the global organization.

This Chapter Addresses the Following Questions:

• Q1 What is agency theory?
• Q2 How are decision-making responsibility and authority related to incentives and performance evaluation?
• Q3 How are ...