Performance Evaluation: Methods and their qualities

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. [...]