Whether Management Rewards Should Solely Be Based on Financial Indicators - Essay Example

Assessment Management Accounting Name Professor Institution Course Date Assessment Management Accounting Should management/employee rewards solely be based on financial indicators? Abstract This report evaluates whether management or employee rewards should solely be based on financial indicators. Management accounting in the past decade has attracted a lot of attention, especially due to increase in industries and businesses. Management accounting has offered the operational control for performance management as it created a number of metrics which could be employed for measuring performance. In numerous situations, organizational performance was associated with the financial results and even measured using financial indicators. However, in the new era, management is considered to be more than financial results, but also non-financial rewards as well how business can be able to survive in economic difficulties. Table of Contents Assessment Management Accounting 2 Should management/employee rewards solely be based on financial indicators? 2 Abstract 2 Table of Contents 3 1.0 Introduction 4 2.0 Performance measurement defined 4 3.0 Overview of Performance measurement based non-financial indicators 5 4.0 Literature Review 6 4.1 Balanced scorecard 6 4.2 Product market performance 7 4.3 Employee’s factor 7 4.4 Job analysis 7 5.0 Discussion of the Performance measurement based non-financial indicators approaches 10 6.0 Conclusion 13 7.0 Reflection 13 8.0 References 15 1.0 Introduction In the previous decade, many researchers have used the management accounting concepts routines. As such, the management accounting concepts have raised an ongoing interest in regular behaviors in the perspective of accounting (Pavlov & Bourne 2011, p. 111). In a number of industries and organization, a concept of management accounting has continued to change over time. Change in the business created a lot of questions that could not be answered by the past management accounting notions. The new form of management accounting has used various indicators of performance away from financial indicators to measure the success of an organization. It should be noted that the earlier cost based accounting that was early accounting management has now been replaced by performance based one (Bourne, Melnyk & Faull 2007, p.781). In the current settings, some scholars and theorist still think that management rewards should mainly be on the basis of financial indicators, others think that its times have changed and other avenues should be used to reward employees. Based on the explanation, this paper evaluates whether management or employee rewards should solely be based on financial indicators. A reflection of the paper will be provided to summarize the discussion. 2.0 Performance measurement defined According to Pitt & Tucker (2008, p.241), Performance measurement is defined as a quantifiable indicator applied to evaluate how well a business or an organization is realizing its set objectives. Richard et al. (2009) contend that organizational performance revolves around three determined areas of a company’s results, including financial performance, product market performance and shareholder return. Richard et al. (2009) argue that in this aspect, financial returns consist of profits, return on investment and return on assets, among others. Product performance on the market includes brand awareness, sales and share of the market. On the other hand, shareholder return comprises of shareholder total return and economic value. Several business managers usually review different performance measure forms to evaluate factors such as demand, production, operating efficiency and results so as to get a point of how the business is performing and whether perfection is needed (Pitt & Tucker 2008, p.247). In past years, numerous organizations have tried to manage and control organizational performance by the use the balanced scorecard method in which performance is monitored and measured in several dimensions like financial performance, customer service, social responsibility and employee stewardship. 3.0 Overview of Performance measurement based non-financial indicators Pavlov et al. (2010) postulate that there are inadequacies in the traditional management accounting systems with regards to their accuracy, validity, completeness, understanding, relevance and consistency has increased the need for modern management accounting systems like the balanced scorecards and activity-based costing among others. There is much to monitoring an organization's performance than just checking at the financial data or information. At an ever-changing level, organizations are trying to measure and monitor some of "non-financial" indicators, which can improve the financial performance (Scapens 2006, p.7). Organizations have established that dependence on upon financial measures alone not to be enough. Financial measures are carried out on the basis of historical data. The emphasis is on previous performance during particular time intervals. This focus has the tendency of encouraging short-term strategic goals. 4.0 Literature Review This paper review five important issues pertaining performance measurement based non-financial indicators, including; balanced scorecard, product market performance, Job analysis, employee’s factor and long-term strategies. 4.1 Balanced scorecard Effective competition in this age needs capabilities not traditionally shown in the current financial statements of accounts. Kaplan & Norton (2008a, p.64) claims that to some extent, a deep dependence on financial performance measures might hinder the future competitive advantages since financial indicators are results measures that do not echo drivers of performance in future and the factual value creation. According to Kaplan & Norton (2006b, p. 101), balanced scorecard is a balanced and powerful strategic management system which enables the execution of the strategy, applying measures to make sure that corporate strategy and vision are executed and realized. The Balanced scorecard was originally theorized as a performance measurement method in which the usual financial measures were combined with non-financial measures relating to the clients, the growth and learning activities in the organization and internal business processes. Kaplan & Norton (2008a, p.65) posit that the scorecard provide answers to four fundamental questions; how do consumer perceive see us? (Thus offering a client perspective), what should the business excel at? (Thus offering an internal context); can the business continue to enhance and create customer value? (Presenting a growth and learning platform), and how does the business depend on shareholders? (This presents a financial viewpoint). Therefore, financial measures are important, but are only one perspective. 4.2 Product market performance Richard et al. (2009) claim that one of the non financial performance measurements is product market performance. This form of measurement is critical for managers because it determines the success and the future of the business. Every business offers its product to the market in order to solve the needs of the customers (Trkman 2010, p.126). In the process, the company aims to get money in return so as to maximize its profits. As such, the company needs to convince the customer that what there are offering will be able to solve their problems. In that way, they will buy and raise the sales of the company. Higher sales are an indicator of positive product market performance. This is also a determinant of good financial performance. 4.3 Employee’s factor Carpinetti, Galda´mez & Gerolamo (2008, p.412) argue that the factors of the employees are another significant component of non-financial performance measurement which businesses must monitor. There are numerous factors that contribute to the general employee satisfaction. Sufficient training and equipment, a supportive environment, respect for and trust of the organization and participation in the film’s plans, are considered some of the aspects which create a high level of morale, better quality and employee motivation and satisfaction (Nowak & Anderson 1999, p.15). 4.4 Job analysis Job analysis is another form of non-financial measurement the management can use to assess the company efficiency (van der Steen 2011, p.503). Job analyses present information to a firm which helps in determining which staff are best fit for particular duties. Van der Steen (2011, p.521) asserts that by means of job analysis, the expert requires to understand what the significant function of the job entails, how they are done, and the needed human attributes desirable to carry out the job effectively. The job analysis process involves the expert clarifying the functions of the sitting employee, then the conditions and the nature of work, and eventually some fundamental qualifications (Richard et al.2009). Qualified employees are normally easy to work with because they are under the job and the challenges that come with it. Measuring the characteristics of a person is considered a very important part of non-financial measurement. Franco-Santos (2007) posits that human being who the employees are social beings that have their strengths and weakness. The current business environment is full of service based organizations (Johansson & Siverbo 2009, p.146). In that way, customer service matters a lot in determining customer satisfaction. Companies must not just measure performance based on the financial indicators to reward their employees, but can measure individual skill, knowledge, customer service and teamwork using job analysis (Lau & Berry 2010, p.587). 4.5 Long-term strategies Non-financial performance measures provide precise advantages compared to performance measurement carried out through financial indicators (Fullerton & Wempe 2009, p.215). One the closer link is the long-term strategies. Lau & Berry (2010, p.301) argue that financial evaluation methods normally concentrate on short-term or annual performances against accounting benchmarks. These systems do not work in favor of progress in relation to customer needs or other market players, nor further non-financial goals which might be vital in attaining profitability, competitive strengths and long-term strategic objectives (Lukka 2007, p.82). For instance, expanding firm capabilities or new product development could be significant strategic objectives, but could delay short-term performance. By complementing management accounting measures with the non-financial information concerning strategic performance and adoption of strategic plans, firms can communicate goals and offer incentives for the managers handle long-term strategies (Lau & Berry 2010, p.294). The opponents of traditional performance measures claim that determinants of success in numerous companies are the “intangible assets” like customer loyalty and intellectual capital, as opposed to “hard assets” used in order to balance sheets (Scapens 2006, p.14). Even though it is hard to measure intangible assets in the financial terms, non-financial often provide quantitative and indirect indicators of intangible assets of a firm In the same way, investments in the customer satisfaction can enhance successive economic performance by improving profits and loyalty among the current clients, attracting new ones and cutting the transaction costs. Non-financial information provides a missing link between the beneficial actions and financial performance by presenting forward-looking data on management accounting or the stock performance (Scapens 2006, p.21). For instance, the interim research outcomes or client indices might present a sign of future cash flows which may not be captured in any way. In the new information era a firm’s success is now measured on its advancement. Companies that are highly computerized are able to efficiently produce market and sell those products. Evans, Leone & Nagarajan (2005, p.14) hold that the new forms performance measurement and management styles have embraced by the majority of contemporary and technologically-savvy firms have demonstrated that companies should not just concentrate on making money but should hence systems that help them maximize their profits. The traditional technology that companies used thirty years ago cannot match current business environment. Quattrone & Hopper (2006, p.214) claim that the current trends and new technologies has been focusing mostly on the performance improvement and quick product delivery to the market so as to gain market advantage. 5.0 Discussion of the Performance measurement based non-financial indicators approaches The balanced scorecard as explained by Kaplan & Norton (2006b, p. 103) is a broadly recognized system of incorporating both financial and non-financial measures to check and manage crucial actions in the value creation. (Kaplan & Norton 2008a, p.67) also claim that comprehensively, summarized, balanced scorecard normally tells the manager the skills, knowledge and systems which employees need to be innovative and create the apt strategic efficiencies and abilities, i.e. the internal processes which will deliver a particular value to their target market that will ultimately result to high level of shareholder value. Lukka (2007, p.77) claims that for some managers, the costs of adopting and modifying diverse indicators overshadow enhancements in the managerial decisions. It could be more practical to concentrate on the selective measures; those attributes of business strategy, the stage of the business cycle or the sector where it operates (Scapens 2006, p12). Kaplan and Norton (2008b, p.69) consider that balanced scorecard develops strategy maps so as to show cause-and-effect connections in which particular improvements build the needed results. In the external environment, performance measure focused on how the business can provide value. Such value cannot be realized through measure of financial indicators. In fact, managers or directors that get rewarded based on financial accounts for their outstanding believe that should be the benchmark of rewards therefore forgetting organization behavior and employees factor is what contributes to financial performance improvement (Pavlov & Bourne 2011, p.116). As such they also rewards employees based on financial accounts. However, contemporary managers are encouraged to use balanced scorecard approach which ensure both financial and non-financial indicators are taken care of (Nowak & Anderson 1999, p.15). Product market performance is one of the ways managers use to reward their employees. Managers use commissions to reward employees based on the increase of sales. Study shows that season products in most countries use commissions to motivate their employees. However, measuring of the product should not just be based on the number of sales it makes but also the demand of the product, lead time and the market delivery time (Trkman 2010, p.128). When all these are known, the manager can be able to make decisions on various markets; whether to increase the lead time, improve brand awareness or to increase the market delivery time. This approach creates objectives and gauge performance with regard to the strategy and vision of the firm, therefore tying measurement to both the short term and long-term objectives of the firm. Positive product market performance measurement is also an indicator of more customer satisfaction (Nowak & Sherri Anderson 1999, p.10). On the other hand, negative product performance is a determinant of poor quality product which results in low sales. Without measuring the performance of the product, the organization must not be able to understand the source of their poor sales in the market. Employee’s factor has become one of the most outstanding aspects of non-financial performance measurement (Lau & Berr 2010, p.297). Factor like motivation morale and satisfaction forms the basis that drives employees urges to work and improve results. Therefore, before measuring financial performance of the organization, the managers must actually measure the level of motivation and satisfaction with environment of which the employees work. The outcomes of this measurement determine whether the company will be able to maximize its profits or not (Trkman 2010, p.27). For that matter the managers who are only on the financial rewards create an impression that the company does not vale its employees but are only interested in making financial gains. Firms are using job analysis to measure the suitability and the motivation, moral and satisfaction for the job. In organization where managers ignore employees factors, absenteeism and employees turnover are witnessed. Studies conducted also established that non-financial performance measurement has a long term benefits as opposed to financial indicators. One research evaluated the capability of the non-financial determinants of “intangible assets” to clarify the disparities of stock market values in the US firms (Pavlov & Bourne (2011, p.7). It established that measures regarding management capability, innovation, workforce relations, brand and quality value explained a major proportion of a firm’s value, even enabling for the assets and liabilities. Kaplan & Norton (2008a, p.104) claim that by eliminating the intangible assets, financial-based performance measurement can push managers to arrive at poor, even detrimental, decisions. Non-financial performance measures could be a better indicator of the future financial performances (Evans, Leone & Nagarajan 2005, p.13. Even if the vital goal is increasing financial performance, the current financial performance measures might not uphold long-term gains from the decisions currently made. Take, for instance, investments in consumer satisfaction initiatives or research and development. Under the U.S. accounting practices, research and development expenses and marketing costs has to be accounted for at the time they are made, thus decreasing profits (Nowak & Anderson 1999, p.16). However, successful research increases future returns if the product can be brought to the marketplace. Managers who are rewarded based on financial indicators have no long term plans for the company. Long term plans also depends on the motivation and commitment of the employees. 6.0 Conclusion This assessment has offered a practical snapshot of both financial and non-financial performance measurement. The paper has also highlighted the changes that have occurred in the business environment, in particular management accounting. Therefore, managers must embrace change so as to remain relevant. Today, most managers are being encouraged to move away from financial based performance and embrace more of non-financial with the aim of focusing both of the employee and customer satisfaction as well as emphasizing on the business performance. Businesses that focus on customer and employee make the two stakeholders how they are valued by the owners or the managers. 7.0 Reflection Performance measurement is an element of organizational success that has existed for decades. Performance enhancement considers change in organization in which management of that organization sets aside some projects to assist boost the existing performance level. In the last decade, many business managers have been using financial indicators to measure the success of their organization. Same managers have been using financial rewards to motivate their employees. However, in the researchers have been recommending to the managers new ways of measuring performance not based on financial. In fact, these researchers and theorists argue that financial performance has outlived its course and is no longer effective. In this perspective the program could wholly change the organization conduct and behavior to enable the changes to come into being. Management intends to increase the organizational effectiveness and competence to deliver its products or services. According to my assessment, the financial based performance should remain the core purpose of nay business endeavors. Just as Milton Friedman argues business should employee its resources and take part in activities created to increase its revenue. In fact, as far as businesses “intend” to provide for the needs for customers, back in the mind of a manager, they are the business of accumulating wealth. Majority of managers are agents of capitalist class, i.e. the business owners. The work of the managers is to do everything possible to ensure the company increases its financial performance. Without financial performance their position is at risk, and this could render them fired. My opinion is that business researchers should not overlook financial performance because for some investors, the firm’s financial performance is very important. The current financial performance is a safe refuge for an investor who wants to invest in the company. Some would want to the operating income, the value of the major assets. Such investor reasons that should the company wind, they will sell its assets to pay themselves. In addition, the investor or analyst may want to look unfathomably into financial statement and look for margin rates of growth or any reducing debt so as tenure the certainty of the business. I believe that even though, the company should balance between financial and non-financial measurements employees must always have in their mind that business normally compete for profits and market share. These two aspects of business are contributed by the financial performance of the company. Times have changed and balance scorecard has become a power tool for measuring performance over time. Modern managers must be able to combine various performance attributes including product quality, product life cycle and delivery time to enable them to provide customer value. I also believe trends in technology has become the face of change in management and any modern manager who expect efficient measurement and improvement in the organization results both financial and non-financial must invest heavily in technological systems. Finally, I still believe financial performance is strong aspect not just as a matter of competition, but to help the company maximize its profits and be in a position to meet its expenses and still remain profitable. 8.0 References Pavlov, A & Bourne, M 2011, Explaining the effects of performance measurement on performance: An organizational routines perspective, International Journal of Operations & Production Management, Vol. 31, no.1, pp.101 – 122. Bourne, M, Melnyk, S & Faull, N 2007, The impact of performance measurement on performance, International Journal of Operations & Production Management, Vol. 27, No. 8, pp. 781-3. 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