Divisional Performance Measurement Behavioral issues: Division managers of SIU Incorporated have been expressing growing dissatisfaction with SIU's methods used to measure divisional performance. Divisional operations are evaluated every quarter by comparison with the master budget prepared during the prior year. Division managers claim that many factors are completely out of their control but are included in this comparison. This results in an unfair and misleading performance evaluation. The managers have been particularly critical of the process used to establish standards and budgets. The annual budget, stated by quarters, is prepared six months prior to the beginning of the operating year. Pressure by top management to reflect increased earnings has often caused divisional managers to overstate revenues and/ or understate expenses. In addition, once the budget is established, divisions must "live with the budget." Frequently, external factors such as the state of the econ- omy, changes in consumer preferences, and actions of competitors have not been recognized in the budgets that top management supplied to the divisions. The credibility of the performance review is curtailed when the budget cannot be adjusted to incorporate these changes. Top management, recognizing these problems, agreed to establish a committee to review the situation and to make recommendations for a new performance evaluation system. The committee consists of each division manager, the corporate controller, and the executive vice president. At the first meeting, one division manager outlined an Achievement of Objectives System (AOS). In this performance evaluation system, divisional managers are evaluated according to three criteria:

1. Doing better than last year. Various measures are compared to the same measures of the prior year.

2. Planning realistically. Actual performance for the current year is compared to realistic plans and/or goals.

3. Managing current assets. Various measures are used to evaluate the divisional management's achievements and reactions to changing business and economic conditions.

One division manager believed this system would overcome many of the inconsis- tencies of the current system because divisions could be evaluated from three different viewpoints. In addition, managers would have the opportunity to show how they would react and account for changes in uncontrollable external factors. Another manager cautioned that the success of a new performance evaluation system would be limited unless it had the complete support of top management.

Required:

a. Explain whether the proposed AOS would be an improvement over the measure of divisional performance now used by SIU Incorporated.

b. Develop specific performance measures for each of the three criteria in the proposed AOS that could be used to evaluate divisional managers.

c. Discuss the motivational and behavioral aspects of the proposed performance system. Also, recommend specific programs that could be instituted to promote morale and give incentives to divisional management.