Chapter 13 Contemporary approaches to measuring and rewarding performance

The purposes of performance measurement §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

Problems with conventional performance measures §Conventional performance measures l are not actionable l emphasise only one perspective §Financial performance measures l provide limited guidance for future actions l can encourage actions which limit future competitiveness

Contemporary performance measurement systems §Include non-financial and financial measures §Have a strategic orientation - directly measure areas that provide competitive advantage §Use external benchmarks §Emphasis continuous improvement

Advantages of non-financial measures over financial measures §Non-financial measures can reflect the drivers of future financial performance §They are more actionable §They are more understandable and easier to relate to

Problems with non-financial performance measures §Wide choice of non-financial measures available §Their development can be ad hoc and undirected §Managers must necessarily make trade-offs §Some measures lack integrity §Some measures may not translate into financial outcomes

Measuring performance with a balanced scorecard §The Kaplan and Norton model translates an organisation’s mission and strategies into objectives and performance measures that reflect four perspectives §financial perspective l customer perspective l internal business processes l learning and growth Cont.

Measuring performance with a balanced scorecard §Measures in the balanced scorecard provide balance between l short-term and long-term objectives l financial and customer measures, and measures of business processes and learning and growth l outcome measures and measures of the drivers of those outcomes l hard, objective and easily quantified measures and soft, subjective performance measures

Key performance indicators and key performance drivers §Key performance indicators (KPIs) l monitor progress towards strategic objectives; they are also known as lag indicators or key performance outcomes §Key performance drivers (KPDs) l provide information which is actionable and manageable, and often related to the processes and activities of the business

Linking non-financial and financial performance measures §Improvements in non-financial measures will not result in improved profits if l management has selected the wrong critical success factors l management fails to utilise freed up resources l the performance measurement system is incorrectly designed Cont.

Linking non-financial and financial performance measures §Du Pont chart l shows the linkages between key performance drivers, key performance indicators and financial performance measures

Benchmarking §A continuous and systematic process of evaluating the products, services and work practices of an organisation against businesses that are considered to be ‘best practice’ §‘Best practice companies’ l high performers in relation to a particular practice or process

Forms of benchmarking §Internal benchmarking l benchmarking operations that are internal to the larger business group §Industry or competitive benchmarking l benchmarking with other companies within the same industry §Generic or process benchmarking l benchmarking against the best practices that occur in any industry

Warning signs of an inadequate performance measurement system §Performance is acceptable on all dimensions, except profit §Customers do not buy, even when prices are competitive §No one notices when performance reports are not supplied Cont.

Warning signs of an inadequate performance measurement system §Significant time is spent debating the meanings of measures §Measures have not changed for some time §The business strategy has changed

Designing an effective performance measurement system §Link to strategy and goals of the organisation §Be simple §Recognise controllability §Emphasise the positive §Be timely Cont.

Designing an effective performance measurement system §Include benchmarking §Embrace participation and empowerment §Include only a few performance measures §Link to rewards

Designing measures for continuous improvement §Continuous improvement can be built into performance measurement systems by l selecting relevant performance targets l defining and re-defining the measure l making the performance target more challenging

Behavioural implications of changing performance measures §Resistance to change l individuals consider targets unfair or unachievable l individual’s pay is involved §Changes are most likely to succeed if l they are supported across the entire organisation l they are not seen as an ‘add on’ to an inadequate performance measurement system

Value-based management §Uses shareholder value analysis to manage a business §Shareholder value analysis l focuses on the future economic earnings of a firm, discounted for the cost of capital l economic value added l cash value added

Reward systems §Processes, practices and systems which are used to provide levels of pay and benefits to employees §Intrinsic rewards l intangible, arise from the positive experiences of being satisfied with performing well §Extrinsic rewards l given to employees

Theories of motivation §Herzberg’s theory of work motivation l hygiene factors - provide the setting for encouraging employee motivation, but do not themselves motivate employees l motivators - factors that relate to job content and which provide employee motivation Cont.

Theories of motivation §Expectancy theory l employee motivation is a result of the relationships between expectancy, instrumentality and valence §Motivational theories need to be considered by managers when they are designing reward systems

Performance-related systems §Performance-related pay systems (incentive compensation schemes) l link employee rewards on achieving or exceeding some performance targets §Employee share plans (share option plans) l provide employees with the right to purchase shares in their company, at a specified price at some specified future time Cont.

Performance-related systems §Profit-sharing plans l cash bonuses are paid to each employee, based on a specified percentage of the company’s profit §Gainsharing l cash bonuses are distributed to employees when the performance of the company, or their segment of the company, exceeds some performance target Cont.

Performance-related systems §Team-based incentive schemes l individuals are rewarded based on their work, team exceeding certain performance targets §Individual incentive plans l individuals are rewarded for achieving individual performance targets

Group vs individual performance §Consider the following issues l identification with the group l equity among employees l competitiveness between employees l relating individual effort to reward l rewarding only good performers §The timing of incentive payments can be crucial to achieving desired outcomes

Exhibit 13.5

Exhibit 13.6