Promotions Turnover And Performance Evaluation Evidence From Division Managers Accounting Essay


This research paper discusses the promotions, turnover and performance evaluation in the context of division manager's careers. It discusses how manager's abilities are evaluated. The knowledge about how chief executive officers (CEOs) are awarded is much but little is known about non-CEO. The purpose of this paper is to discuss the relation between promotions, turnover and different metrics of performance evaluation. The limitations of this paper are that it studies the firms with stable and well-defined organisational structures. This paper study firms with two divisions and require that the divisions to be of same size. This paper chooses the publicly traded firms listed on the Compustat. The sale of whose segments should be more than 25% and less than 75% in comparison to the whole sale of the firm. Each firm must consist of two divisions each year and these divisions comprise of one segment but in some cases it can consist of more than one segment. The simple metric return on assets (ROA) is very important in evaluating a manager's performance. The relation between division manager turnover and return on assets (ROA) is a strong negative relation. On the other hand relation between the likelihood of promotions and return on assets (ROA) is a positive relation. Thus accounting performance of a division plays an important role in division manager's performance evaluation. Sometimes in internal promotions other factors such as seniority and specific skill set of an executive also effect promotions. The other metric which firms use for performance evaluation is relative performance evaluation (RPE). The manager's turnover is negatively related to industry performance. The poorer relative to industry performance is associated with high turnover. On the other hand there is no evidence which shows that in promotion decisions industry performance is an important tool. There is little evidence in turnover decisions that managers are evaluated relative to internal counterparts. Although in the case of promotions there is strong evidence in manager's evaluation relative to the internal counterparts. The likelihood of the promotion of a manager whose division is performing better than the counterpart is higher. These findings are consistent with the hypothesis that managers are evaluated on the base of ordinal rankings. The division size also effects the promotion decisions. The incentives are good at times to motivate managers but it includes the possibility of competition between the divisions. If the divisions have large difference in performance then promotion based incentive may become weak.

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This research paper has four authors and all of them belong to the educational institutes. So the four authors of this research paper are academic writers. The three out of these four are from American universities while the remaining one is from Indian School of business. The four authors are Michael S. Cichello, C. Edward Fee, Charles J. Hadlock and Ramana Sonti. Charles J. Hadlock has PhD degree in economics and is currently working as a Professor of finance in Michigan State University. The other universities for which Charles J. Hadlock has worked include Chicago, Michigan, Virginia, Illinois and Florida University. Charles J. Hadlock also has many academic and teaching awards and honours (Hadlock, 2010). C. Edward Fee holds a Ph.D. degree and is Associate Professor of Finance in Michigan State University (Fee, 2010). Ramana Sonti is Associate Professor in Indian School of Business. He has a Ph.D. degree in finance and has also worked for other universities such as Tulane, Kent State and Michigan State University (Sonti, 2010). Michael S. Cichello is working as a visiting professor in Finance Department The Wharton School University of Pennsylvania (Cichello, 2011). Ramana Sonti is from Indian institution whereas the remaining three authors belong to the American universities as it is described above.

Critical analysis:

The topic of this paper is promotions, turnover and performance evaluation: evidence from the careers of division managers. The question discussed in this paper is that how to evaluate and reward the performance, effort or abilities of managers. This paper discusses the possibilities of turnover and promotions of the managers. Different performance measures are used to discuss this problem that how the metrics relate to performance evaluation.

The knowledge about how chief executive officers (CEOs) are awarded and evaluated in a firm is much but in comparison little is known about non-CEOs. The CEOs and non-CEOs collectively are important for a firm and have significant effect on a firm value. So to discuss how division managers depart from their employees and are rewarded penalty outcomes such as promotions is important. Promotions in any field are very important for the workers either they are CEO are not. So this research paper is very important because it find the links between accounting measures of performance and promotions about divisional managers. As a result the issue discussed in this research paper is very important.

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The introduction of this research paper is not so good. It does not seem to be a proper introduction. The introduction should includes that what issues will be addressed in the research paper. It should also include that why the issue discussed is important and how it would be discussed. In addition, the introduction should also include the assumptions about the results. However the introduction of this paper describes the question to be discussed. In addition, it also describes the importance of the issue which is good. However the authors rarely make any assumptions about the question. Also most of the time it discusses that we find, for example the relation between division manager's turnover and return on assets is negative. Which are a result and not a hypothesis or assumption and it also includes some other results in the introduction. It includes and compares these results to other theories but it should be in conclusion. So the introduction of this research paper looks like a conclusion rather than the introduction as it rarely make any supposition but describe results. As a result the introduction of this research paper lack in many ways which needed to be solved. The overall plan of the research paper is also needed to be improved. The introduction does not describe what it should describe. Actually the introduction does not show the reader that how the author is going to deal with the title. Therefore it needs to be corrected to show that how the author is going to deal with the title. Similarly there is no symmetry in the research paper that what metric would be discussed next.

Compensations and turnover: In this part of the research paper the author describes literature about compensation given to executives. The CEOs are compensated based on firm and individual performance. The weight age of this compensation for individual performance is higher than the firm performance for the CEOs. While to compensate the division managers the firms rely on accounting figures. While in the case of turnover the industry performance is less related to non-CEO dismissals then to the CEO dismissals. This is a good point rose by authors that how industry performance relates to compensation and turnover of CEOs and non-CEOs.

Internal promotions:

As discussed in the importance of the topic that every one like to be promoted and so is very important for everyone in any firm. In the segment of internal promotions the author describes some useful primary determinants of promotions within the firm. If the unit of a bank is performing well the number two executive is more likely to be promoted and the role of individual performance among a set of candidates is not considered. In the case of insurance claim processors the promotions are directly related to productivity. The promotion of assistant football coach is directly related to individual performance metrics. The point about all these three examples is that how performance metrics relates to promotions but the contradiction is this that it cannot be generalised because these examples are from different firms who almost operate differently to each other. If accounting figures are a determinant of promotion than the relation between promotion and the accounting performance is positive. Also some other factors can participate in the promotion decisions. This can be the seniority of the manager, relation to the headquarters, specific skill set and the behaviour. So in these cases there would be almost no link between accounting metrics and the promotions. This is very important because from this it can be observed that practically accounting performance is a reliable tool in promotion decisions.

Performance evaluation is actually the main theme of this research paper. In the section of performance evaluation it is discussed that what metrics will be initially used to evaluate the performance of division managers. Before this some previous literature about how executives are compensated and turnover is provided. After that how promotions take place within the firm is discussed. So in this section it is described that which metrics will be investigated about turnover and promotions. Initially the author use rate of return to evaluate division performance and then the other metrics will be examined. It is good that authors himself describes their limitations and some of the factors that they cannot observe. This non observable factor can be the good or bad luck factor. So it is obvious that in such a case the original link between these metrics would be different from the result that will found. In this section it is described that initially which metric will be tested and firm can use different metrics such as cost income ratio, adjusted ROA and industry benchmarking. So until this there is no idea that after ROA which metric will be tested and so on. As the topic is about performance evaluation so it restricts that the accounting metrics that are useful in evaluating manager's performance would be investigated. The reason for this is that the purpose of this paper is to find which accounting performance best meets to performance evaluation.

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The authors describe in limitations of the study that the evaluation of managers on the basis of publicly available information dictates the study that only publicly related firms are studied. Also the firms that are durable and have stable management and divisional structure are studied. The author is might be doing this in order to get the required results perfectly. Doing this he can might get the required results easily or it may be because of that the required information can be easily obtained by choosing this type of firms. Here the author describes a little that choosing firms with specific features maximizes the ability that how managers are evaluated in comparison to the counterparts. After this the authors again like the introduction provide results. The results are described here before even performing. Infect it should be discussed here that how these limitations will affect the analysis and the expected results. The contradiction here is that it is discussed that what are our final results rather then what they would be.

It is good that author describes that why to choose a manageable number of firms in the sample. The sample looks to be alright and according the hypothesis. The drawback of this data is that it is chosen from the information provided by companies such as firm's 10-K statement. The final sample was as firms must have two divisions each year, divisions should be of typically one segment and in some cases it can be more than one segment. Each division was assigned a manager and if there was more than one manager mentioned then the whole group is assigned as division manager. In addition, the approach taken by the authors to test the hypothesis also seems good. This approach was to test the hypothesis though job changes such as manager is still working on the same post, departed or stayed within the firm and the other possible cases.

In table 1, panel B the authors describe the possible job changes, number of observations, % of total, mean ROA and median ROA. Mean ROA for probable promotion is 22.41 percent whereas for definite promotion it is 16.48 percent. From the figures of mean ROA it looks that relation should be reciprocal. The category which has lower mean ROA is given definite promotion and the category which has higher mean ROA is given probable promotion. Why it is so is not described and there is no information about this. On the other hand the job changes are described that what it includes, for example definite and probable promotion. The job observation is assigned the title of definite promotion as if the new job title is CEO, CFO, COO, president or chief administrative officer. The observation is given the title of probable promotion when the individual holds the old position but is given more responsibilities or assumes a position that has some corporate oversight.

The author suppose that if better performance shows managers effort or ability then the coefficient in these models should be negative. The column 1 of table 3 shows a negative coefficient for divisional ROA. This shows that firms use accounting metrics for evaluation of managers. If the firms consider the industry performance in evaluation then the coefficient should be positive because it indicates poorer performance relative to the overall industry performance. The column 2 of table three shows positive coefficient for industry performance. This indicates that industry performance counts for turnover decisions. Also the coefficient for divisional ROA is consistent with the column 1 of table 3. Table three proves that divisional ROA, industry performance and industry adjusted performance relates to managerial evaluation. While counterpart performance, firms performance and firms one year excess stock returns provide little evidence about managerial evaluation.

To find the robustness of the turnover findings additional control variables and different estimation techniques are used. Which prove that better performance relative to the industry performance is associated to managerial evaluation? Which also proves the robustness of turnover findings?

The initial approach used by author to test managerial effort or ability is ROA but different techniques can be used for this purpose. The authors use three year or five year changes in ROA. The model 1 and model 3 of table 3 are qualitatively unchanged. Although when one year ROA is used as a performance measure the coefficient was insignificant. So changes are related to divisional manager turnover if changes are measured for long duration. There is a possibility that firms can use growth as a signal of managerial effort or ability. This possibility is examined and the coefficient is insignificant. So there is a little evidence that firms use growth in managerial evaluation.

Sample characteristics and turnover: This is a very good section included by the authors in research paper that how the sample characteristics can affect the generality of their findings. To explore this issue it is discussed that how firms characteristics can affect turnover findings. From table 5 it is found that author's findings are not entirely driven by studying a small set of durable firms or post 1988 period. Also it does not provide any strong evidence which shows that turnover to performance is affected by the stability of a division's structure. There is a little evidence that counterpart performance is measured in turnover decisions. As column 4 of table 5 shows that coefficient for interaction is negative and significant. This suggests that managers are rewarded rather than penalised for strong other division performance.

If strong performance represents managerial effort or ability then the relation between these two is to be positive. In column 1 of table 6 divisions own ROA is used as performance measure but it does not provide any significance relation between performance and promotion. In column 2 the counterpart ROA is added and as a result the coefficient of division own ROA becomes significant at 10 percent level but the coefficient of counterpart performance is negative and insignificant. When alternative metrics are used it is found that promotion is based on accounting performance and not on changes in ROA. Also table six reveals that industry performance is not important for promotion decisions. The coefficient of division size and growth variable is also insignificant.

The authors find the answer of the questions they set out that how different metrics are used in performance evaluation. The authors find that relation between turnover and division ROA is negative. In addition they also do not find any strong evidence that managers are compared with other divisions of the firm. Promotions are positively related if one division is performing better than the other but weekly related to the level of division performance. Also managers are evaluated on the basis of ordinal rankings. The results of this research paper are very useful because it discusses that how managers are evaluated and finds some useful results that how performance metrics are related to promotion and dismissal decisions. The research of this paper is very important because it uncover many questions. As this research paper is about how to evaluate the executives below the CEO. This paper is focused to answer the questions that how division managers are evaluated by using different metrics which is an important contribution to the research of this area because it provides the relation that how different metrics are related to promotions and turnover. The writing style of this paper looks good. The way the tables, findings and limitations are explained in this research paper is good but the clarity about objectives is not so good. Also the best of this research paper is that the authors describe the questions which are still needed to be answered. The overall plan of proceeding the research was almost good. Also when the authors find a result by using a metric then they check the robustness of their finds in comparison to the alternate metrics. Also the author's compares their findings to the previous findings to check that whether they contradict to the previous ones or do not.

The focus of this paper is to find the metric which best represents the managerial effort or ability. This paper discusses that how different metrics matter in performance evaluation of division managers. The initial approach of this paper is return on assets. Return on assets is the first metric discussed in this research paper and how it matters in evaluation of division managers. This is consistent with the work of Holmstrom that firms should use the metrics which are more informative about managerial effort or ability (Hölmstrom, 1979). The work of this paper about counterpart performance evaluation is consistent with the work that managers will be promoted based on ordinal rankings of performance (Rosen, 1986). The discussion in this paper on industrial benchmarking that how it measures the ability of division managers is followed by the work of Holmstron that firms use relative performance evaluation (RPE) (Holmstrom, 1982). The work done in this research paper is similar to the work done by A. Scott Keating. The results of this research paper are discussed above in summary and analysis. A. Scott Keating discusses divisional accounting metrics, firms accounting metric and firm stock price as performance measures (Keating, 1997).

Implications for the Management Accounting:

This research paper raises very important questions of management accounting. In fact this research paper not only raises the questions of management accounting but also provide the solutions to the raised questions. Also discusses the questions which are still needed to be solved. The main question discussed in this research paper is that how to evaluate the divisional managers. As it is discussed that knowledge about how the executives below CEO are evaluated is not enough. This paper discusses that how different metrics such as division ROA, industry adjusted ROA and ordinal rankings counts in the decisions that whether the manger will stay or depart and if the manager is staying than what would be its new position. So the issue that what is ROA how it is used by firms and its importance in relation to the promotion or turnover decisions is discussed in this research paper. Similarly that how other metrics are used by the firms is discussed.

There is no doubt about the usefulness of the findings of this research paper but it is very important for me because it helped me a lot in increasing my knowledge especially about the question discussed in this research paper. I actually never think like that what other issues matter in evaluation. For me the only metric for promotion or turnover is that how well or bad you have performed about your task or job. For example in doing this assignment what matters is that how good or bad this assignment is done and whether it is what the authority wanted. This research paper in fact discussed the different terms in very detail that how these terms are considered by firms in decisions of promotion or turnover. The idea that what metrics can be used in evaluation is not new to me but the findings that how exactly they relate to promotion or turnover is not completely but is knew for me, for example how managers are evaluated based on ordinal rankings of performance.

The study of this paper is carried by real life companies. So the findings of this research paper are from the real life examples. The findings of this research paper show that how different metrics behave in taking decisions about managerial effort or ability. In fact the findings of this research paper are very useful for firms and for the division managers. This is so because these findings help the organisations in a way that which metric for evaluating a division manager is better in comparison to the other metrics. It helps the firms to decide that which metric is best and represents the managerial effort or ability in more detail. The findings of this research paper are very useful for division managers as they provide some useful information about evaluation. The findings uncover information that how division managers are evaluated and how it matters. So managers can use these findings practically to increase the probability of promotion and to decrease the probability of turnover by using the metric which best represents their abilities. The findings of this research paper are practically very useful for firms and division managers. This research paper provides very meaningful information about the different metrics of performance evaluation. The firms with similar size and features can use the information disclosed by this research paper to improve the decisions relating to managerial effort or ability. If firms use profit as performance indicator then the managers will focus only on it. So it is very important that the firms use the metric which best represents a manager's effort or ability. In addition firms can use this information in future to get better results.

Suggestions for improvements:

The title of this research paper Promotions, Turnover and Performance Evaluation: Evidence from the Careers of Division Managers is alright but on the first look it guides in the wrong direction. From the wrong direction means that it does not give the exact view of the research paper. The word in this title which confuses is turnover. This does not mean that the word is wrong or it cannot be used. It can be used here of course and becomes clear after reaching half a way of the research paper or when it is fully read. The problem with this word is actually that on reading the title of this research the first thinking which comes in mind is different from what is discussed in the research paper. On reading the title the word turnover confuses in a way that profit will be discussed in the research paper. In addition it also comes in mind that how profit effects managerial evaluation. So on reading paper it becomes clear that profit is actually not discussed and by the word turnover in this research paper actually means dismissals. This is actually what does not come in mind on reading the title. So the better title for this research paper would be Promotions, Dismissals and Performance Evaluation in the Context of Division Manager Careers.

The areas which are still covered and need research are seniority, relations, ethics, specific skills, good or bad fortune and relationship with higher authorities. These are the areas which needed research to answer the questions that how these areas relate to promotions and dismissals. It is needed to be discussed in detail that the relation of these issues with performance evaluation is positive, negative or they have no effect. Also the research can be carried to check that whether the expectations of the authorities effect promotions. So how these expectations matter in performance evaluation for division managers. Also another research area can be customer's satisfaction. If these issues matters then how and how much is the consideration of these issues in performance evaluation of division managers. So these are the areas which need investigation to answer many questions.

The managers whose age is more than 63 are excluded in this research paper. The reason given in this paper to exclude those managers is that they are over age. This reason does not look good to exclude someone. If a person whose age is over 63 and working as a division manager and the firm has no rule that maximum age of the workers is that for example (65, 70). If a firm mention maximum age of its workers and that age affects the sample or findings then to exclude a person looks alright. But if it is not like this and a person is working as a division mangers it should not be excluded. So the managers which are aging over 63 should be included. In this research paper it is discussed that firms with two divisions are included. These divisions must have one segment but in special cases they can have more than one segment. The authors in this research paper do not describes that which are those special cases in which a firm can have more than one segment. These special cases should be discussed that why in these cases divisions with more than one segment are included. In addition whether it effects the generality of the findings or not and what changing's in the findings can be caused due to this. Also the authors selected the firms sale of whose segments is more than 25 percent and is less than 75 percent of the firm's total sale. It is discussed that it is done to maximise the likelihood that managers are compared to each other. In fact firms with any proportion of sale in comparison to the firm whole sale would be considered.

Description of planning the analysis of the research paper:

The approach followed in analysing is theme by theme. This approach is actually taken for best understanding of research paper. This approach in analysis is taken for maximum understanding the research paper. The approach of author is followed because it is tried that what and why author is saying something. It is done because when the goals are same the maximum results can obtained. So it is followed in order to make sure that nothing is going to miss out of it. So the theme by theme approach is followed to make sure that each part of the discussion is considered in analysing. This is also done so to prove that everything is considered in analysing the research paper and nothing is going to miss out. In addition the research paper is analysed theme by theme in order to provide the best possible critique on it. So this is all about that about the approach taken in analysis.

The sources which are used in analysing this research paper are very long. Different sources are used to conduct the analysis of the research paper. Here it will be discussed briefly that what sources are been used to conduct the analysis. The lecture slides were studied and relevant information about the given topic was collected. The information about the slides which is given by the teacher is also studied as personal notes for conducting the analysis. The personal notes were also very useful because they helped to understand the different issues. The guidelines about assignment in slides by the tutor are mainly focused in conducting the analysis. The different other research papers which are relevant to the research article are also used to conduct the analysis. Such as determinants of divisional performance evaluation practices (Keating, 1997), Evaluating General Managers Performance (Merchant, 2007), authority, risk and performance incentives: evidence from division manager positions inside firms (Wulf, 2007) are used to conduct the analysis. There are some other articles and books which are also used but not discussed here. In addition to this I also discussed it with my other class fellows.

I started working on this research paper on 10th December 2010. From 10th December to 15th December the article is studied three times to understand it perfectly. Then after this different articles are chosen from internet and some books from the library and studied in detail for better understanding and analysis of the article. This is done from 16th December to 25th December. On 26th December 2010 I wrote the overall summary of the research article. For the next two days I accessed the corresponding institutions to gain the information about the authors and I wrote this in the summary of the research paper. Then from 29th December 2010 to 3rd January 2011 the critical analysis of the research paper is carried out. On the 4th and 5th of January I wrote about the implications for the management accounting. Then on 6th and 7th January I wrote that how this research work can be improved. On the 10th of January it is described that how this analysis is carried out. Finally on the 11th of January 2011 the references was been written.