Question 2: Divisional managers of SIU Incorporated have been expressing growing dissatisfaction with the current methods used to measure divisional performance. Divisional operations are evaluated every quarter by comparison with the static budget prepared during the prior year. Divisional 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 had been established, divisions were required to "live with the budget." Frequently, external factors such as the state of the economy, changes in consumer preferences, and actions of competitors have not been adequately recognized in the budget parameters 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 the current problems, has 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 who serves as the chairman. At the first meeting one division manager outlined an Achievement of Objectives System (AOS). In this performance evaluation system, divisional managers would be evaluated according to three criteria:

Doing better than last year - Various measures would be compared to the same measures of the prior year.

Planning realistically - Actual performance for the current year would be compared to realistic plans and/or goals.

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

A division manager believed this system would overcome many of the inconsistencies 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.

A second division manager was also in favor of the proposed AOS. However, he cautioned that the success of a new performance evaluation system would be limited unless it had the complete support of top management. Further, this support should be visible within all divisions. He believed that the committee should recommend some procedures which would enhance the motivational and competitive spirit of the divisions.

Required:

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

(2) Develop specific performance measures for each of the three criteria in the proposed AOS which could be used to evaluate divisional managers.

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