Home / Summaries / Management Control and Cost Management / measures-bsc-measure

Incentive systems

7 important questions on Incentive systems

What are some risks of incentive systems?

Crowding-out effect: monetary incentives can crowd out intrinsic motivation to perform a task.

Offering financial incentives for prosocial (blood donor) can reduce prosocial behavior.

Incentives may signal information about task at hand. It could be perceived as difficult or risky. --> mistrust

Incentives can have unintended effects: pushing sales instead of profits

What are some shortcomings of performance measures?

Are imperfect. Representation of economic consequences of employees actions. May not pick up many activities that they do

surrogation: fail to see measure as imperfect proxy of construct ofinterest and tend to behave as tho the measure is the interest (exam grades)

manipulation / distortion: ignoring those aspects of the job that are not measured. Leads to gaming the system: improving measures without creating value.

What are some solutions to these shortcomings? And their pros and cons?

SUBJECTIVE PERFORMANCE EVALUATION
- incorporates non measureable aspects: helping others, innovation, team spirit.
- three forms: no performance measures, there is performance measures, there are multiple perf measures
- however: leads to favoritism, compression bias, contrality bias, leniency bias.

RELATIVE PERFORMANCE EVALUATION
- noise reduction: teasing out the effect of common noise in performance measurement. Like adding peer group.
- however: destructive competition, sabotage, cheating, makes self oriented and less collaborative

MULTIPLE PERFORMANCE MEASURES
- risk reduction and improves congruity
- however: loses ocus on one measure and spreads it

What limitations does the balanced scorecard address?

- Short termism.
- Financiel measured are backward looking.
- Failure to track sources of competitive advantage.
- Dysfunctional behaviors such as gaming.
- Lack of emphasis on intangible assets.
- Lack of explicit connection between strategy and performance measurement.

What does the balanced scorecard entail?

- Leading indicators (nonfinancial) as well as lagging indicators (financial)
- Measure and manage intangible assets to be succesful in the long term
- Strategy map: a framework to describe, visualize, and translate strategy intoactions

Comprised of
- financial, customer, internal business process and learning & growth scorecards

What sort of biasses are there?

Common measure bias: unique measures are often ignored. Possibly find a third party for good measures

Outcome bias: evaluators prefer outcome or driver measures. Are often leading indicators

General bias: profit over measures linked to strategy.

Financial bias: often gets more weight. Can be improved with trends.

What are some cautions in using BSC?

- Validation is important
- Some relations are u-shaped
- Focussing on the wrong measures

- Think of BSC as a process
- BSC is not to define strategy, but to describe and implement
- BSC is not a benchmarking tool, its a customized tool
- BSC needs commitment and engagement of several managers
- Avoid too many measures
- Consider costs and benefits of parts in BSC: costs are often overlooked

The question on the page originate from the summary of the following study material:

Management Control and Cost Management

View summary