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a good day to you all welcome to the Chartered Accountants Academy management accounting in finance the presenter for the day is matzo wash envira with the lecturer in the management accounting and finance department and today I am going to be covering with you performance evaluation so our learning objectives are to understand why performance measurement is important number two to distinguish between functional and division alized organizational structures and the concept of control and last but not least to discuss how residual income and return on investment in how they tie into net present value now let's get right into it now why do we need performance management first of all to encourage congruence by evaluating managers for measures which will maximize sustainable long term growth now due to the sizes of entities they are often divided into separate independent divisions but many may it in the best interests of the division a lot of the company so therefore it is needed that performance measures ensure go congruence now for example if bonuses depend on short-term profits managers who do anything to increase this profits so this meant this might be in the best interest of any entity who wants to invest in long term sustainable growth so for example a manager can invest in a project with a net present value if you increase the current year profits in the short term so that's a classical example of how a manager may not act in the best interests of the entity so the best way to fix this is to evaluate on so to encourage congruence these need to manage to evaluate managers or measures to maximize long-term growth and also they need to align the camp the employees goals with the entity's goals so that all goals come together to encourage goal congruence now our second issue or our second reason why we need performance management is to prevent the agents problem now in general what is an agency problem so this is a problem that occurs or usually happens when in agents of the company that is usually management does not work in the best interests of the shareholders so you showed us can be your stock holders can be really vistas so because management is hired as an agent for the shareholders it is supposed to make decisions that will benefit shoulders which in most cases is to maximize shoulders work now when you manage our ever decides to work in is own best interests instead in a John's problem now or case so the agents might ignore what is best for the shareholder enjoy what is best for him instead so managers might want to maximize their own world but this might cause a conflicts between the managers in the shoulders so to minimize this agency problem or this conflict of interest to encourage managers to work in the best interests of shareholders an entity or the shield has made introduced incentives so...