The Use and Usefulness of Nonfinancial Performance Measures

Abstract

A SURVEY OF 128 FIRMS LOOKS AT HOW COMPANIES USE FINANCIAL, NONFINANCIAL, AND SUBJECTIVE PERFORMANCE MEASURES IN ORDER TO BETTER UNDERSTAND HOW DIFFERENT PERFORMANCE MEASURE TYPES CONTRIBUTE TO AND AFFECT MANAGEMENT STRATEGIES. EXECUTIVE SUMMARY Using survey data from manufacturing managers of 128 firms, this study empirically examines the extent to which firms combine financial, quantitative nonfinancial, and performance measures. Both the relative use of measure types and specific within each type are found to vary with the companies' manufacturing strategies. This supports claims that the three types of play different roles in supporting a firm's operations. A related finding is that the measure types have different impacts on important employee actions, such as risk taking, efforts at innovation, relative emphases on the short vs. long term, and the propensity to game the performance evaluation system. It is well accepted that performance measurement plays many important roles in running an organization. These include translating strategy into desired behaviors and results, communicating these expectations, monitoring progress, providing feedback, and motivating employees through performance-based rewards and sanctions. For a long time, managers had primarily used accounting-based for these purposes. But with the advent of new competitive realities such as increased customization, flexibility, and rapid response to customer expectations, as well as new manufacturing practices such as Just in Time and total quality management, many have argued that accounting-based performance measurement systems are no longer adequate. In the past decade especially, a wide variety of and systems have been proposed and implemented to overcome the purported limitations of accounting-based in these environments. A prominent example of these new approaches is integrated performance measurement systems, such as the balanced scorecard.1 While proponents have made a persuasive case for the new and measurement systems, the support they have provided for these new systems mostly has been in the form of anecdotal evidence with limited scope, claims based on proprietary studies, or even simple, though intuitively appealing, illustrations. Furthermore, there is a tendency to downplay, if not outright ignore, the potential shortcomings and limitations of the alternatives being proposed. While the limited scope of such support does not necessarily negate the potential usefulness of the proposed changes in performance measurement, it is insufficient for guiding informed adoption decisions. Managers need a more systematic understanding of the advantages/benefits and the disadvantages/costs of the new approaches compared to those of traditional accounting-based systems. The aim of this article is to contribute toward building such an understanding. Specifically, we investigate the relative use of financial, quantitative nonfinancial (nonfinancial for short), and performance by a sample of 128 firms. The term subjective measures is used to represent nonfinancial that are derived from judgment. We further explore whether financial, nonfinancial, and performance differ on such characteristics as controllability and vulnerability to measurement errors and, more importantly, impact on such behaviors as risk taking, efforts at innovation, and gameplaying. The results indicate that companies with different manufacturing strategies use different mixes of the three types of measures. This is consistent with each type of measure performing a different role in supporting operations. Further supporting this inference is that the three types of do have some different effects and properties which, interestingly, are not always in the directions suggested by prior literature. To help readers follow our study and to interpret our findings, we start by reviewing the key points that have been made about the characteristics and impacts of financial, nonfinancial, and performance measures. …

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 101 citations exist upstream.