Professional Documents
Culture Documents
Chandigarh
Performance Measurement
Not everything that can be counted counts, and not everything that counts can be counted
Albert Einstein
1
of Performance Measurement
Chandigarh
What gets measured gets improved Focuses attention on the items measured Poorly designed measures can result in misguided decisions
Financial statements
Designed for reporting purposes, not guidance Historical, short-term focus Follow arbitrary rules Ignores non-financial information Much useful information is not reported Easy to manipulate through operating decisions
3
Examples
Profitability
Net income Return on assets
Financial position
Debt position
Stock price
4
Examples
Standard costing and related variances Comparisons of actual results to budgets or targets Market share
Chandigarh
Lack of relevance
Many measures are interesting, but not useful
Market share, revenue, etc. Trends may be useful
Chandigarh
Lack of vision
Short-term focus impedes decisions with long lead times or long-term payoffs Focus on what is currently being done, not what should be done Fail to consider the overall organization
Chandigarh
11
12
13
Measurement Chandigarh
Systems
Initiative must start at the top
Senior management has overview, power to implement the system Goals of lower levels determined by needs of higher levels
Top down system prevents local optimization while emphasizing overall optimization
14
Measurement Chandigarh
Systems
Must be balanced
Financial and non-financial measures
15
Measurement Chandigarh
Systems
Must promote intended behavior
Employees actions must be aimed at improving the organization, not meeting arbitrary goals Poor measures promote dysfunctional behavior Employees must understand why something is being measured
16
Measurement Chandigarh
Systems
Performance-based compensation
Powerful motivator Who participates? General guidelines
Must promote intended behavior
Long-term or short-term goals?
Employee must understand the performance/pay link Employee must have some control over the measures Must be significant enough to motivate Pay for ideas?
17
Measurement Chandigarh
Systems
Must look beyond the entity
External groups can provide useful information Measures should be benchmarked
Other departments or divisions Other entities
18
Useful
Not everything can be measured in monetary terms
Customer service Goal attainment Innovation Employee involvement
19
Many companies believe they could be useful, but do not measure them
Difficult to measure Resistance to change
Chandigarh
The Top 10
Ability of the company to execute its strategy Credibility of management
Does the company do what it says it will do?
21
Chandigarh
Innovativeness
How readily does the company adapt to changing technologies and markets?
Chandigarh
Management experience
What skills and experiences does the management team bring to the organization? What is their success rate in similar situations?
Executive compensation
Are compensation policies aligned with strategy? How many executives have their pay tied to value creation?
23
Chandigarh
Research leadership
How well does the management understand the link between creating knowledge and using it? R&D budget as a percent of sales, profits and cash flow
24