Alignment of Performance Measurement to Sustainability Objectives: A Variance-Based Framework

33 Pages Posted: 23 May 2013 Last revised: 3 Dec 2013

See all articles by Saurav K. Dutta

Saurav K. Dutta

State University of New York (SUNY) at Albany

Raef A. Lawson

Institute of Management Accountants

David Marcinko

Skidmore College

Date Written: May 22, 2013

Abstract

Meaningful incorporation of environmental and social responsibility goals into organizational strategic plans requires a mechanism to measure and reward performance contributing to that objective. This paper formulates such a framework using management accounting concepts. We demonstrate that the benefits of pursuing sustainability objectives can be decomposed into three parts. The first consists of what might be considered a natural outcome of pursuing the traditional economic goal of efficiency through cost-minimization (a "waste" variance). The second part consists of sustainability gains that produce societal benefit but may be incongruent with short-term economic goals (a "sustainability" variance). The third part stems from a change in optimal output level when that is considered endogenous to the firm (a "volume" variance). While elimination of waste variances can be encouraged using a traditional performance evaluation and reward structure, elimination of sustainability and volume variances requires redesign of performance evaluation tools and reward structures. We demonstrate that failure to recognize and incorporate the difference between the three variances can lead to inefficient allocation of resources, over- or under-production, and only partial fulfillment of environmental goals. Further, availability of shadow price information is essential to implementing such a performance measurement system; thus it is a public policy imperative to develop markets that establish such prices.

Keywords: sustainability, waste, variance, performance measurement, compensation systems, shadow prices

Suggested Citation

Dutta, Saurav K. and Lawson, Raef A. and Marcinko, David, Alignment of Performance Measurement to Sustainability Objectives: A Variance-Based Framework (May 22, 2013). Journal of Accounting and Public Policy, 2013, Vol. 32:6 pp. 456-474. dx.doi.org/10.1016/j.jaccpubpol.2013.08.008 . Available at SSRN: https://ssrn.com/abstract=2268679

Saurav K. Dutta (Contact Author)

State University of New York (SUNY) at Albany ( email )

135 Western Ave
Building, Room 109
Albany, NY 12222
United States

Raef A. Lawson

Institute of Management Accountants ( email )

10 Paragon Drive
Montvale, NJ 07645-1760
United States
2014741532 (Phone)
2014741603 (Fax)

David Marcinko

Skidmore College ( email )

815 North Broadway
Saratoga Springs, NY 12866-1632
United States

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