S_Session 15 - Responsibility Accounting - Post Class.pdf

5 finally 3 and 4 are combined so that a managers

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5) Finally, 3) and 4) are combined so that a manager’s compensation ( i.e., salary, bonus, promotion opportunities ) is linked to his/her performance higher (lower) when performance is better (worse) than budgeted.
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13 Performance measures can be either (or both) a) financial measures such as revenues, costs or profits, or b) non-financial measures such as throughput time or customer satisfaction. Performance measures can also be objective (e.g., ROI of 10%) or subjective (e.g., supervisor’s rating of a subordinate on a 1 to 5 scale from “poor” to “excellent”). Balanced scorecard" is the term used to describe an incentive system that includes both financial and non-financial measures. Some have argued that non-financial measures are more important in today’s world because intangible assets, such as intellectual capital, are more important than the tangible assets tracked in financial reports and are not (well) captured by the accounting system. Many actions that the principal would like the agent to take may actually hurt short-term financial performance, so motivating the agent to take these actions may require a “balance” between financial and non- financial measures and leading and lagging indicators .
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23 Figure 1 Business Model for US/European Consumer Bank Product Service Conformance Cost Effective Price Effective Right Customer Right Amount Right Time Predictability Control Everyone Cares Communications Recognition Skills Development Partnership Role Modeling Product Service Process COST QUALITY RISK PEOPLE INNOVATION CUSTOMER RELATIONSHIP SATISFACTION MARKET SHARE GROWTH FINANCIAL PERFORMANCE
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Incentive Reward Systems, Linking Responsibility and Performance
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A firm’s salary structure can be used to provide employees with incentives by linking the distribution of salary increases (raises) to the employees’ performance through the use of a merit increase budget for each class of employee. In general, the budgeted average merit increase will be based on the increase in the market wage for the class (e.g., 3%). And, a particular individual's salary increase will be based not only on his/her (salary) position within that class but also on his/her relative performance evaluation . Example : Presented below is an example of a merit increase matrix based on a budgeted average salary increase of 3%: Relative Performance Salary Range for Position Below Average Average Above Average Upper 1/3 0% 1% 3% Middle 1/3 1% 3% 5% Lower 1/3 2% 5% 7% Salaries and Incentives Merit increases increase with performance Merit increases decrease with position in grade 25
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% of Consultants Rank Evaluation 5% 1 Promote 25% 2 Above average 40% 3 Average 25% 4 Below average 5% 5 Warn / Terminate Typically, a relative performance evaluation begins with an evaluation of the employee’s performance, by her superior(s), to obtain an overall rating for the individual.
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