Developing a Comprehensive Performance Measurement System in the Banking Industry: An Analytic Hierarchy Approach
Kwak, Wikil, Academy of Banking Studies Journal
The objective of this study is to design a practical model for a comprehensive performance measurement system that incorporates strategic success factors in the banking industry. A performance measurement system proposed in this study can be used to evaluate top managers of a main bank or managers of a branch office.
Performance measurement should be closely tied to goal setting of an organization because it feeds back information to the system on how well strategies are being implemented (Chan & Lynn, 1991; Cheng & Li, 2001). A balanced scorecard approach (Kaplan & Norton, 1992) is a hot topic currently in this area, but it does not provide systematic aggregation of each level as well as different levels of managers' performance for the overall company. In other words, there is no systematic linkage between financial and non-financial measures across different levels of management hierarchy. A traditional performance measurement system, which focuses on financial measures such as Return on Assets (ROA), however, may not serve this purpose well for middle or lower level managers in the new competitive business environment either.
The model proposed in this study will have a broader set of measures that incorporate traditional financial performance measures such as return on assets and debt to equity ratio as well as nonfinancial performance measures such as the quality of customer service and productivity. Using Saaty's Analytic Hierarchy Process (AHP) (see Saaty, 1980; Harker & Vargas, 1987), the model will demonstrate how multiple performance criteria can be systematically incorporated into a comprehensive performance measurement system. The AHP enables decision makers to structure a problem in the form of a hierarchy of its elements according to an organization's structure or ranks of management levels and to capture managerial decision preferences through a series of comparisons of relevant factors or criteria. The AHP has been applied recently to several business problems (e.g., divisional performance evaluation (Chan & Lynn, 1991), capital budgeting (Liberatore et al., 1992), and real estate investment (Kamath & Khaksari, 1991), marketing applications (Dyer & Forman, 1991), information system project selection (Schniederjans & Wilson, 1991), and activity-based costing cost driver selection (Schniederjans & Garvin, 1997)). The AHP is relatively easy to use and its commercial software is available. This study will be the first analytical and comprehensive performance evaluation model to cover a broader base of measures in the rapidly changing environment of today's banking industry. The following section presents background. The third section discusses methodology. The fourth section presents a numerical example. The last section summarizes and concludes this paper.
Recent Research Topic Guide from Institute of Management Accountants lists "performance measurement" as one of top priority research issues. Therefore, this project will be interesting to bank administrators as well as managerial accountants.
With unprecedented competitive pressure from non-banking institutions, deregulation and the rapid acquisition of smaller banks by large national or regional banks, the most successful banks in the new millennium will be the ones that adapt strategically to a changing environment (Calvert, 1990). Current management accounting literature has emphasized using both financial and non-financial measures as performance guidelines in the new environment (e.g., Chan & Lynn, 1991; Rotch, 1990). However, most studies don't propose specifically how we should incorporate these financial and non-financial factors into a formal model.
The performance measurement system proposed in this study is the first formal model applied using the AHP in the banking industry to cover a wide variety of measures …
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Publication information: Article title: Developing a Comprehensive Performance Measurement System in the Banking Industry: An Analytic Hierarchy Approach. Contributors: Kwak, Wikil - Author. Journal title: Academy of Banking Studies Journal. Volume: 2. Publication date: Annual 2003. Page number: 105+. © 2008 The DreamCatchers Group, LLC. COPYRIGHT 2003 Gale Group.
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