Which Performance Measurement is Best for Your Company?
Management Accounting Quarterly, Vol. 4, No. 3, pp. 32-41, Spring 2003
Posted: 29 Aug 2009 Last revised: 3 Mar 2010
Date Written: 2003
Abstract
An ongoing concern of firms is how to measure performance in ways that support a long-term, forward-thinking strategic view across the entire organization. Many systems and measures purport to accomplish this goal. Each of three measurement systems, Economic Value Added (EVA), tracking stocks, and balanced scorecards, takes a distinctly different approach to measuring firm performance. In this paper we examine strategic considerations in determining which of these measures or combination of these measures a firm should use. We begin by discussing each of the three alternatives, followed by a comparison of the three alternatives, and then address measurement combinations. Our recommendations are incorporated throughout. We conclude that tracking stocks are more appropriate for large firms and situations where a market-determined measure of performance is needed. Tracking stocks are less appropriate when detailed information about performance is needed. Balanced scorecards and EVA are more appropriate for smaller firms and situations where information beyond that provided by a market measure of performance is needed. The difference between balanced scorecards and EVA is that balanced scorecards should be considered when a functional focus is desired, whereas EVA should be considered when a project focus is desired. Combinations of these systems can be used in the same firm; however, the benefit of multiple systems must be carefully balanced with the added cost, increased complexity, and potential conflict and sub-optimization of implementing multiple measures.
Keywords: balanced scorecard, tracking stocks, EVA
JEL Classification: G30
Suggested Citation: Suggested Citation