In this video tutorial, accounting professors Jim and Kay Stice explain the importance performance evaluations and incentives. They use an example that demonstrates how performance evaluation and a compensation system can align economic incentives to the benefit of all involved.
- As you remember, my family and I moved to Hong Kong in 1995. - I do remember. At the time, you and Ramona had four children. Now, what was the hardest part of helping the children make the move from Houston to Hong Kong? - Well, I think that the most difficult part in getting settled in Hong Kong was getting the four children enrolled in schools. - Your two daughters attended a British school located adjacent to the university campus where you were living. How about your two sons? - Ah, my two sons, Derrald and Han. They attended an international school that was about a 45 minute trip away from our apartment.
At the time, they were ages 13 and 11. Now, I went with them to school their first day for their school orientation. - How did you make the trip? I know you didn't have a car when you lived in Hong Kong. Did you take a taxi the whole way? - No, no, we rode a bus about half the way and then transferred to the subway. Now, you may remember that the subway in Hong Kong is called the MTR. - Well, wasn't there a school bus or something? - Well, at the orientation, I learned that the two boys could ride a private school bus. The cost was seven US dollars per day. - Seven dollars a day each? That seems kind of expensive.
- Yeah, that's what I thought. Now, because we had traveled to the school by public transportation, I knew that my sons, as students, could travel to and from school each day for about one dollar each. - So, you could save six dollars a day for each boy if they would be willing to ride public transportation to and from school. - Exactly. Now, that was the analysis that I was doing in my head as I sat in the school orientation meeting. - Yes, but how could you get your two sons to agree to catch the bus and then transfer to the subway and then finally walk the final leg from the subway station to their school? With the school bus, they could relax the whole way.
- Well, as I thought about it during the school principal's orientation presentation, I guess I should've been paying attention to her. But anyway, I had an accounting measurement performance evaluation insight. I would offer to split the savings with my sons. - Now, I know your sons. The possibility of making some money each day would be of interest to them. - Absolutely. Now, after the orientation meeting, the three of us went out into a little park behind their school. I explained my plan. If they would ride public transportation to and from school, I would pay them three US dollars every day. In effect, I would split the six dollar family savings with them 50/50.
- And what did they say? - They agreed immediately. Thereafter, at the end of each school week, on Friday, I paid them $15 each. Five school days multiplied by their three dollars, their half of the family savings. - So, were there any difficulties associated with this system? - Just one. They were sad to learn that I paid them nothing during school vacations, because there was no transportation savings when there was no school. I think they may have started resenting school vacations. The vacations were costing them money. - So, during your three years in Hong Kong, did you ever again have to have a conversation with your two sons about getting the cost of getting to school the benefit the family gets from public transportation and so forth? - Never, because this performance evaluation compensation system had perfectly aligned their economic interest with my economic interest.
No additional explanation or encouragement was needed. - Ah, the perfect accounting solution.
In this course, accounting professors Jim and Kay Stice explain what KPIs your business should consider in a balanced scorecard, from financial goals to employee and customer satisfaction. They describe how to craft a clear mission statement that complements your KPIs, and how to tie performance to incentives. Plus, get a look at KPIs in action, as Jim and Kay break down a case study examining a trucking company's balanced scorecard.
- The importance of KPIs and measuring performance
- Financial goals and measure
- Customer needs and satisfaction
- Employee growth
- Creating an effective mission statement
- Linking measurements and rewards
- Examining a KPI case study