Innovation in Performance Measurement

JMAR Volume Ten 1998

Innovations in Performance Measurement: Trends and Research Implications

Christopher D. Ittner David F. Larcker University of Pennsylvania

Abstract: The objective of this paper is to foster research on recent innovations in performance measurement by providing a rich description of emerging measurement practices and suggesting directions for future research. Using survey data coiiected by consuiting firms and government organizations, we examine three measurement trends: (1) economic vaiue measures, (2) nonfinancial performance measures and the balanced scorecard, and (3) performance measurement initiatives in government agencies. Existing research on these topics is reviewed and research opportunities are highlighted.

The choice of performance measures is one of the most critical challenges facing organizations. Performance measurement systems play a key role in developing strategic plans, evaluating the achievement of organizational objectives, and compensating managers. Yet many managers feel that traditional accounting-based measurement systems no longer adequately fulfill these functions. A 1996 survey by the Institute of Management Accounting (IMA) found that only 15 percent of the respondents' measurement systems supported top management's business objectives well, while 43 percent were less than adequate or poor. In response, firms increasingly are Implementing new performance measurement systems to overcome these limitations. Sixty percent of the IMA respondents, for example, reported they were undertaking a major overhaul or planning to replace their performance measurement systems. The perceived inadequacies in traditional accounting-based performance measures have motivated a variety of performance measurement innovations ranging from "improved" financial metrics such as "economic value" measures to "balanced scorecards" of integrated financial and nonfinancial measures. However, despite increasing adoption of these...