The human factor is critical in evaluating performance. Behavioral principles include the following.
1. Managers of responsibility centers should have direct input into the process of establishing budget goals of their area of responsibility. Without such input, managers may view the goals as unrealistic or arbitrarily set by top management. Such views adversely affect the managers’ motivation to meet the targeted objectives.
2. The evaluation of performance should be based entirely on matters that are controllable by the manager being evaluated. Criticism of a manager on matters outside his or her control reduces the effectiveness of the evaluation process. It leads to negative reactions by a manager and to doubts about the fairness of the company’s evaluation policies.
3. Top management should support the evaluation process. As explained earlier, the evaluation process begins at the lowest level of responsibility and extends upward to the highest level of management. Managers quickly lose faith in the process when top management ignores, overrules, or bypasses established procedures for evaluating a manager’s performance.
4. The evaluation process must allow managers to respond to their evaluations. Evaluation is not a one‐way street. Managers should have the opportunity to defend their performance. Evaluation without feedback is both impersonal and ineffective.
5. The evaluation should identify both good and poor performance. Praise for good performance is a powerful motivating factor for a manager. This is especially true when a manager’s compensation includes rewards for meeting budget goals.
Performance evaluation under responsibility accounting should be based on certain reporting principles. These principles pertain primarily to the internal reports that provide the basis for evaluating performance. Performance reports should:
1. Contain only data that are controllable by the manager of the responsibility center.
2. Provide accurate and reliable budget data to measure performance.
3. Highlight significant differences between actual results and budget goals.
4. Be tailor‐made for the intended evaluation.
5. Be prepared at reasonable time intervals.
In recent years, companies have come under increasing pressure from influential shareholder groups to do a better job of linking executive pay to corporate performance. For example, software maker Siebel Systems unveiled a new incentive plan after lengthy discussions with the California Public Employees’ Retirement System. One unique feature of the plan is that managers’ targets will be publicly disclosed at the beginning of each year for investors to evaluate.