Assessing the Performance of Business Unit Managers

Abstract

Using a sample of 140 managers, we investigate the use of various performance metrics in determining the periodic assessment, bonus decisions, and career paths of business unit managers. We show that the weight on accounting return measures is associated with the authority of these managers, and we document that both disaggregated measures (expenses and revenues), and nonfinancial measures play a greater role as interdependencies between business units increase. The results suggest separate and distinct roles for different types of performance measures. Accounting return measures are used to create the proper incentives for managers with greater authority, while disaggregated and nonfinancial measures are employed in response to interdependencies. * Tilburg University. We appreciate comments from

Value-based management as a tailor-made management practice? A literature review

“…Five studies examine delegation or decision-making authority. 41 Overall, the notable finding from these studies is that organizations with a stronger delegation of decision authorities take more advantage from the use of accountingbased performance metrics and value-based performance metrics (Bouwens and Lent 2007;Dekker et al 2012).…”

“…For example Athanassakos (2007) finds that adopters have younger and more educated executives with an accounting and finance background. 40 Further, three studies examine change in top-management (Lehn and Makhija 1997;Bühner et al 2004;Lueg 2008) Bouwens and Lent (2007), and Lueg (2008) identifies no direct linkage between value-based management adoption and compensation structures. 36 Wallace (1997), Biddle et al (1999), Hogan and Lewis (2005), Balachandran (2006), Ryan and Trahan (2007).…”

“…3). The diversification level of firms is analyzed using the number of segments (Garvey and Milbourn 2000;Hogan and Lewis 2005), the relative size of business units (Hogan and Lewis 2005;Bouwens and Lent 2007), the specialization ratio measured as the sales of the largest segment divided by total sales, or one minus the ratio (Bühner et al 2004;Rapp et al 2011), or the calculation of the Herfindahl index (Garvey and Milbourn 2000). 20 As a matter of decentralization, the scope of value-based management utilization is further included in the work by Peixoto (2002) and Dekker et al (2012).…”

Performance Measurement and Incentive Intensity

“…For example, some authors include the number of performance measures as a determinant of intensity, but they do not consider the influence of specific measures and their properties (see Zenger and Marshall, 2000). Others take into account only certain properties of performance measures, such as risk and distortion (see Bowens and Van Lent, 2006). Certain analyses focus on the examination of case studies (see for example Gibbs et al, 2009), while others do not make in-depth studies of the implications of performance measurement for incentive intensity.…”

“…In the last few years, empirical work has addressed the influence of performance measurement on incentive intensity (see Zenger and Marshall, 2000;Bowens and Van Lent, 2006;Gibbs et al, 2009;Kauhanen and Napari, 2012, among others). Despite the advances made by these recent studies, empirical work on this issue is still scarce, and much remains to be learned about how the decision to implement low or high powered incentives is made.…”