Measuring managerial performancenew challenges. Many commentators have argued that the deterioration in manufacturing results from a preoccupation with short-term financial performance measures. Many firms base bonus plans for senior executives on annual accounting income. This method provides incentives to take actions that enhance short-term earnings performance but that may not serve the best long-term interests of the firm. By contrast, firms in other countries give executives incentives to ensure the long-run viability of their companies. Consequently, they are more concerned than their North American counterparts with long-run productivity, quality control, and managing the companys physical assets.

Not everyone agrees with the observation that North American business executives are preoccupied with short-term financial performance to the extent that they would take actions contrary to the best long-run economic interests of the organization just to make themselves look good on the performance measures. But suppose that an executive faces a choice between an action with a positive short-run effect on performance measures and another that has better long-run consequences for the organization but that will not affect short-run performance measures positively. We cannot fault a rational executive for taking the action that looks good in the short run. As the saying goes, You have to look good in the short run to be around in the long run.

How would you design a control system that encourages top-level managers to be concerned about long-run productivity, quality of products, and the long-run economic well-being of the company? Assume that these managers have previously focused on maximizing quarterly and annual earnings numbers to the detriment of these other factors.