Handbook of Finance: Investment Management and Financial Management

Chapter 59. Measuring the Performance of Corporate Managers

HAROLD BIERMAN, JR., PhD

The Nicholas H. Noyes Professor of Business Administration, Johnson Graduate School of Management, Cornell University

Abstract: The owners of a business want to evaluate the performance of the firm's managers and the senior operating manager wants to evaluate the managers working for him/her. The objective performance measures must effectively consider the amount of resources that are utilized in earning the unit's income. If done correctly, the performance measures lead to decisions consistent with the objectives of the owners.

Keywords return on investment, economic income, residual income, economic value added, cash flow return on investment

This chapter will consider and evaluate different quantitative financial measures of performance, including return on investment and economic income. One of the underlying issues is whether performance measurement and decision making of a firm should be on a decentralized or centralized basis. Any multidivisional firm can be turned into a completely self-contained unit by doing away with profit centers, and by considering the entire corporation as an operating entity. The arguments of this chapter are applicable to entire firms, self-contained operating components of a firm, or components that are not self-contained but in which there is a reasonable transfer pricing procedure. Although the desirability of profit centers is to a large extent separate from the ...