Explain the relationship between performance management and incentives using the key findings from the three articles attached to this question. The word limit should be 1500-2000.
LITERATURE REVIEW MADE WITH CIMO METHODOLOGY: ARTICLE 10
Article link:
https://www.proquest.com/docview/220616665?accountid=9874&parentSessionId=5Y2t8K33g1yUeDyYp5VXFqMNifPEPcT4QwRW1xms3%2BA%3D&sourcetype=Scholarly%20Journals
The paper Performance measurement systems, incentive reward schemes and short-termism in multinational companies: A note, by Jeff Coates, Ted Davis, and Ray Stacey (1995), seeks to investigate and prove the relationship between performance measurement systems (PMSs), managerial incentives schemes and how they can influence multinational company’s (MNCs) focus on short-term versus long-term performance. The study was made based on field surveys from 45 corporate entities (15 large parent groups and 30 of their subsidiaries) that belong to large Multinational Companies that were equally chosen from the U.K., the U.S., and Germany, from different business sectors such as chemical, engineering, aerospace, and automobile engineering.
The intervention or process that is being implemented in the paper, is the incorporation of the different managerial incentive schemes in the PMSs of the MNCs analyzed that the “Company performance measurement systems (PMSs) were generally observed to be composed of mission statements, expressions of the strategies to be used to fulfill the mission, linked with the establishment of objectives and a set of performance measures and incentives seen as significant to the achievement of the objectives” (Coates et al, 1995 p.127). According to Coates et al (1995), the most common objective seen in companies is profitability, followed by marketing objectives like sales growth and market share performance.
The study of Coates et al (1995) analyzed how the different incentive schemes can have a significant impact on the multinational companies across these three countries by reinforcing, narrowing, modifying, or broadening the focus of performance measures systems among their managers. For example, in the article, we can see some companies use some incentive schemes that narrow their concentration to focus on short-term financial indicators, such as the focus on profitability, while other MNCs engage with incentives that broaden the performance to include both short-term and long-term objectives (Coates et al, 1995).
According to Coates et al (1995), incentive structures are one of the principal systems from which a company can influence the managerial behaviour to pursue objectives and they go hand in hand with the performance measures. The incentive schemes can have a positive or negative impact on short-term attitudes from the managers and directives, depending on their design and the performance measure they aligned with (Coates et al, 1995).
The outcomes obtained from the paper, from the field study performed in the 45 corporate entities across the U.S, Germany, and the U.K., show the results of the relationship between the incentive schemes and the performance measures, by analyzing the impacts that the first have on the second ones, depending on the narrow, reinforce, modify, and broaden effects they can have (Coates et al, 1995). Analyzing the data provided in the study by Coates et al (1995), we can observe the following results among the head offices:
Reinforcing (R): companies can reinforce an existing performance measurement by choosing the same indicator as their incentive scheme. U.K. #5 has the same measurement for both indicators: share/equity/share options, and this represents a reinforcement of the performance measure.
Narrowing (N): they can narrow the approach by choosing fewer performance indicators. This is the case of U.S #1, since they are using three performance indicators: (1) share/equity/share options; (2) profit; and (3) marketing sales, however, they use the bottom-line profit as their only incentive scheme, using a narrow approach.
Modifying (M): they can modify the measures, using a variety of indicators, therefore providing a balance between the narrowing and broadening effects. For instance, U.S #3 uses profit/sales as their only performance measure but also includes share/equity/share options and bottom-line profit in the incentive structure. This effect slightly broadened the focus, but at the same time, it remained the original stress.
Broadening (B): they can broaden the focus and include additional ranges of managerial tasks. A clear example can be found in G #2, where the incentive scheme used is management by objectives (MBO), which is broader than the single performance measure of residual income, and therefore they are broadening their focus.
To conclude the analysis, the paper provides interesting facts on how the studied companies from the three countries, use the different incentive schemes in their performance measurement systems and the implications that one has on the other. The key findings imply that the type of incentive a company chooses can have a significant impact on the performance measurements and in the corporate strategy and behaviour. Therefore, the organizations should align both indicators to meet the objectives set by the corporations.
