Performance evaluation is a topic of ongoing concern, interest and controversy. While the main goal of performance measurement is to provide a basis for the assessment of employee’s objective achievement it also helps to develop strategic plans and when properly designed it gives the motivation to work towards goals that are aligned with the principals residual interests (Ittner & Larcker, 1998). However, this incentive alignment is subject to major discussion. For example Josef Ackermann (2008), CEO of Deutsche Bank, admitted that one reason for the development of the sub prime crisis was the bonus system among banks. He argued that bonuses should establish the right incentives and be oriented towards medium- and long-term goals. He assessed tying bonuses to maximize profits in the short term – which encourages managers to take high risks – as the wrong approach. The question is therefore, which kind of measurement techniques can be used to reflect the subordinate’s incremental contribution to the firm value and how they can be designed to serve the principals’ goals. The paper is organized as follows. The first part provides an overview of performance evaluation in general followed by the main part about objective and subjective performance measures, their benefits and shortcomings. Before concluding, the balanced scorecard – a tool for performance evaluation that combines both financial and operational measures – is analyzed and described. [...]
Table of Contents
- Introduction
- Performance evaluation - overview
- Objective performance evaluation
- Advantages
- Shortcomings
- Subjective performance evaluation
- Advantages
- Problems
- Combined evaluation tool: The Balanced Scorecard
Objectives and Key Themes
This paper explores the complexities of performance evaluation, highlighting the importance of aligning employee incentives with organizational goals. It examines different approaches to performance evaluation, focusing on both objective and subjective measures, their benefits and shortcomings.
- The importance of aligning employee incentives with organizational goals.
- The advantages and disadvantages of objective and subjective performance measures.
- The impact of subjective performance measures on investments in intangible assets.
- The influence of performance evaluation on corporate growth opportunities.
- The Balanced Scorecard as a comprehensive tool for performance evaluation.
Chapter Summaries
The introduction sets the stage for the paper, emphasizing the importance of performance evaluation in aligning employee actions with organizational objectives. It highlights the challenges and controversies surrounding incentive-based compensation, using the subprime crisis as an example. This section introduces the paper's structure and key themes.
The second chapter provides a general overview of performance evaluation, drawing from agency theory. It explains how performance measures serve various purposes within an organization, including the assessment of target achievement, the determination of compensation, and the support of personnel decisions. The chapter highlights the challenges involved in evaluating employees who perform multiple tasks and discusses the importance of considering the sensitivity, precision, and congruity of performance measures.
The third chapter focuses on objective performance evaluation, which relies on quantifiable, financial data such as budgets, profits, and accounting returns. It delves into the advantages of objective measures, emphasizing their reliability and credibility. This section also analyzes the shortcomings of objective measures, acknowledging their limitations in capturing intangible contributions and their susceptibility to manipulation.
The fourth chapter examines subjective performance evaluation, which complements objective measures by capturing non-quantifiable aspects of an employee's performance. It explores the advantages of subjective measures, including their ability to assess intangible contributions and encourage long-term investments. The chapter also discusses the challenges associated with subjective measures, such as potential bias and the difficulty of ensuring consistency.
Keywords
Performance evaluation, objective measures, subjective measures, incentive contracts, agency theory, Balanced Scorecard, intangible assets, corporate growth opportunities, incentive alignment, short-term vs. long-term goals.
- Quote paper
- BSc in Economics Tobias Westermaier (Author), 2008, Performance Evaluation: Methods and their qualities, Munich, GRIN Verlag, https://www.grin.com/document/113776
