ACCOUNTING MEASURES IN EVALUATING TOP MANAGEMENT PERFORMANCE

Abstract

The paper provides a theoretical framework to assess the adequacy of accounting measures in the evaluation of top management performance. It has often been claimed by economists that accounting measures of profitability are inadequate measures of managerial performance. Our objective is to analyse whether accounting measures are appropriate performance measures. The key characteristics of an ideal performance measure are its congruence with the principal's goal (an increase in its value should reflect increase in wealth for owners of the firm) and its noisiness (it should be noiseless to uncontrollable events). Such a measure would act as both a target for management and an assessment of its performance in terms of achieving owners' goal. While a stock price is perfectly congruent measure, it is not likely to be an efficient measure for incentive purposes. The article starts by contrasting the German corporate governance structure to the UK - USA one in order to find out the likely development of the Slovene corporate governance model by considering economic and legal circumstances in which the Slovene companies operate. Thereafter consideration is given to some of the empirical studies to examine the congruence of accounting profit and stock price. We then briefly overview the most widely used profitability ratios as well as additional accounting and non accounting information which help assess different aspects of top management performance. Since corporations in the touristic sector face similar problems regarding management control, the conclusions of the paper are as well applicable to the larger companies of the sector. The paper concludes with a discussion of the implications for further accounting research of this field.