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Assignment of Performance Performance

decision rights evaluation system reward system

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 Communicate the strategy and plans of the business and

align employee’s goals
 Track performance against targets
 Identify problem areas
 Evaluate subordinates’ performance, and as a basis of
rewards
 Guide senior managers in developing future strategies and
operations

 An ideal performance management system is one that

energizes the people in an organization to focus effort on
improving things that really matter – one that gives people the
information and freedom that they need to realize their
potential within their own roles and that aligns their
contribution with the success of the enterprise

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 Performance measures should aim at the long-term and

should be forward-thinking initiative designed to
fundamentally change the way corporations do business. It is
not a post-mortem of what happened but a step towards how
we do better in the future

 A good performance measurement systems needs a balanced

set of performance measures - both lead and lag indicators

Lag indicators Lead indicators

The indicators of the past The indicators of performance
performance that measure how that we predict future success
we performed

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Market
share

New
Many non- Product product
quality developme
financial nt
indicators can
Leading
serve as lead indicators
indicators in
certain Employee Customer
settings morale satisfaction

Personel
developme
nt

 In contrast to lead indicators, lag indicators are measures that

point to earlier plans and their execution
 Financial performances are lag indicators
 Hence, improvements in performance measures should, over
time, flow through to improvements in lag indicators

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 They are not actionable

 Financial measures emphasise only one perspective

 Financial performance measures provide limited guidance for

future actions
 May encourage actions which decrease both shareholder and
customer value

Most organizations measure performance using accounting

measures – Net profits, gross margin, ROA, ROE, ROI, RI, etc.

However
 Accounting measures are lagged indicators

 Dependent on the choice of measurement method

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 Include non-financial and financial measures

 Have a strategic orientation - directly measure areas that
provide competitive advantage
 Use external benchmarks
 Emphasize continuous improvement

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GOAL MANAGERIAL PERFORMANCE REWARD

CONGRUENCE EFFORT MEASURES

FEEDBACK
FEEDBACK

To achieve maximum benefits at minimum cost, a

management control system must foster goal congruence
and managerial effort.

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TRADITIONAL APPROACH
• Too often, companies depend entirely on financial accounting
systems to report data and financial measures to evaluate
performance.

WHAT’S WRONG

There was little integration of goals and success factors,

strategies and measurement systems.

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 Managers tend to focus their efforts in areas where

performance is measured and where performance affects
rewards.
 “We are basically determined by the weight of what’s in our
in-boxes, and if everything in the in-box is about cost and
efficiency measures, and there’s nothing about measuring
innovation and quality and service, then the company is
going to instinctively focus on what’s measured.” -- Tom
Peters

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How is the system In the bottom-up

built? direction

In the top-down How does the

direction system work?

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IMPROVE
COMPETITIVENESS Financial
measurement
HIGHEST QUALITY is a barry to
achieve
LOWEST COST strategic goals
FASTEST TO MARKET

Reduce cost
by hiring unskill labor

Volume variance Payroll cost Purchase price var

FINANCIAL PERFORMANCE MEASURES

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Decisions are not made in a What is the

vacuum company/organisation’s:
Mission
Vision
Ethics

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 What is your organisation’s core value?

 Why do you do what you do?
 It is important for customers and especially your employees.
Employees often do not know what is the company’s
mission
 When people understand and believe in the company values
their contribution improves
 It defines your goals and how you will measure them (KPI’s)

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 Our mission is to serve the best pizza in Cardiff

 Our mission is to present the highest quality Italian food

 Our mission is to present, with integrity, the highest quality

entertainment solution for families

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Planning Communication

Organization Controlling

 As accountants you can play a part in all of these steps. The

Balanced Scorecard plays a significant role in STEPS 3 and 4
 It is about establishing standards of performance, measuring
performance and taking corrective action

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Fortune magazine reported that less than 10% of

strategies are effectively formulated and executed

In most organisations workers think strategy is what

senior managers do

“Strategy implementation is everyone’s everyday day

job” Kaplan

The Balanced Scorecard helps you operationalise

your strategy

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The balanced scorecard approach to performance measurement

focuses on four different perspectives of performance and uses both
financial and non-financial indicators to set performance targets and
monitor performance.

Multiple measured should be used where each measure reflects a

different aspect of achievement and several are non-financial.

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 “Balanced” refers to the fact that we now recognise that

you cannot control performance by only looking at the
financial perspective (tangible). Other perspectives are
essential to the process of strategy execution(intangible)
 “Scorecard” means we are developing and using KPI’s to
measure our performance in meeting agreed objectives
 If you can’t measure it you can’t manage it

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FINANCIAL CUSTOMER PROCESS LEARNING

AND GROWTH

 Each perspective must have clear objectives(outputs). There is

causality between these perspectives which must be identified.
Kaplan’s original diagram

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Vision/Strategy

FINANCIAL PERSPECTIVE
“If we succeed, how will we look to our shareholder?”

CUSTOMER PERSPECTIVE
“To achieve my vision, how must I took to customer?”

INTERNAL PERSPECTIVE
“To satisfy my customer, at which processes must I excel?”

LEARNING PERSPECTIVE
“To achieve my vision, how must my organization learn and improve?”

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Increase
Profit

Grow Reduce
Revenue Cost

Build
Customer
Loyalty

Improve New Faster

After sale Innovative Development
Service Products Time

Develop Develop
Hire
Current Strong Team
Experts
Staff Skills Culture

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 It is tempting to measure too much “Not everything that can

be counted counts” Einstein
 Clear mission/vision/objectives are your guiding light to
avoid these errors

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 Clarity about what matters most for the success of your

business
 Stop spending effort on things that do not matter
 See your business in a new perspective
 You start asking the smart questions about how to improve
the success of your business
 Appreciate how different part of your business interact

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A performance measure is a comparison that provides objective

evidence of the degree to which a performance result is occurring
over time. Key words:
 Comparison

 Objective

 Evidence

 Performance result

 Over time

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 A goal is not an action, it is a result. Both are important but they

are not the same thing
 Results are specific and tangible.

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 “The time from when we first place the order with the supplier to
delivery on site decreases”

 When is an order placed (how will this be defined)

 Delivery to site (how is this defined)
 Time period (week; month ;year?)
 Clearly identify the order

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 The formula for calculating the values of your measure really

has to be written down, expressed in so much detail that each
piece of required data is clearly evident, and the appropriate
statistics are used to summarise that data into the values of
your measure
 (Sum of (date ordered –delivery date)/(count of orders))

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 Is the data presented well? ( table; graph ; pie chart)

 Are you using the KPI’s to achieve your goal? If your KPI’s are
not giving you the true position you will take action when you
should not. And when needing attention is ignored
 All reports should answer the following questions:
 1. What is happening?
 2. Why is it happening?
 3. What now?

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 Short termism is when there is a bias towards short term rather

than long term performance.
 It is often due to the fact that managers’ performance is measured
on short term results.
 Organisations often have to make a trade off between long term
and short term objectives.

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 Postponing or abandoning capital expenditure projects which

would eventually contribute to growth and profits, in order to
protect short term cash flow and profits
 Cutting R & D expenditure to save operating costs and so
reducing the prospects for future product development
 Reducing quality control to save operating costs adversely
affecting reputation
 Reducing the level of customer service to save operating costs
 Cutting training costs or recruitment so the business may
experience skill shortages or existing workers may be overworked

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 Make short term targets realistic

 Provide information so managers are aware when making trade
offs
 Evaluate managers’ performance in a way that rewards long term
planning
 Link managers’ rewards to share price to encourage goal
congruence
 Set quality based targets

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