Soviet Success Indicators and the Evaluation of divisional Management

Abstract

The corporate headquarters in a large divisionalized firm and a planning bureau of a centralized economy face many similar problems of coordination and control. One important problem is to provide division or enterprise managers with incentives both to act in congruence with the goals of the center and to transmit accurate information so that the center's coordinating decisions may be enhanced. In order to provide managers with the proper incentives, Soviet planners and Western firms have used success indicators (or performance indicators, as they have been referred to in the accounting literature) as a basis for rewarding managers. The purpose of this paper is to integrate the research on Soviet success indicators with the study of such indicators in the accounting literature, and to suggest a new indicator for use in properly motivating enterprise or divisional management. The analysis proceeds by assuming that each division manager possesses perfect knowledge of his own division's technology and the market conditions it faces. Each division's profits, however, depend upon certain coordinating decisions taken by the center (e.g., the allocation of capital). The center is assumed to be at least partially ignorant about the operations of the divisions and to rely on information from the divisions in making coordinating decisions. In this setting, where perfect information is available, problems of risk aversion and risk sharing do not arise and a rather minimal test for motivating accurate profit forecasts is given. Specifically, a performance indicator should have the property that if a manager is rewarded on the basis of this indicator and if he has perfect knowledge of his profit function, he should be motivated to send accurate estimates of that function.