Chapter 13

Contemporary approaches to measuring and rewarding

performance

The purposes of performance measurementCommunicate the strategy and plans of the

business and align employee’s goalsTrack performance against targetsIdentify problem areasEvaluate subordinates’ performance and as a

basis of rewardsGuide senior managers in developing future

strategies and operations

Problems with conventional performance measures

Conventional performance measures are not actionable emphasise only one perspective

Financial performance measures provide limited guidance for future actions 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 benchmarksEmphasis continuous improvement

Advantages of non-financial measures over financial measures

Non-financial measures can reflect the drivers of future financial performance

They are more actionableThey 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-offsSome measures lack integritySome 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 customer perspective internal business processes learning and growth

Cont.

Measuring performance with a balanced scorecardMeasures in the balanced scorecard provide

balance between short-term and long-term objectives financial and customer measures, and measures

of business processes and learning and growth outcome measures and measures of the drivers of

those outcomes hard, objective and easily quantified measures

and soft, subjective performance measures

Key performance indicators and key performance drivers

Key performance indicators (KPIs) monitor progress towards strategic objectives;

they are also known as lag indicators or key performance outcomes

Key performance drivers (KPDs) 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 management has selected the wrong critical

success factors management fails to utilise freed up resources the performance measurement system is

incorrectly designed

Cont.

Linking non-financial and financial performance measures

Du Pont chart 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’ high performers in relation to a particular

practice or process

Forms of benchmarking

Internal benchmarking benchmarking operations that are internal to

the larger business group

Industry or competitive benchmarking benchmarking with other companies within the

same industry

Generic or process benchmarking 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 timeThe business strategy has changed

Designing an effective performance measurement system

Link to strategy and goals of the organisation

Be simpleRecognise controllabilityEmphasise the positiveBe timely

Cont.

Designing an effective performance measurement system

Include benchmarkingEmbrace participation and empowermentInclude only a few performance measuresLink to rewards

Designing measures for continuous improvement

Continuous improvement can be built into performance measurement systems by selecting relevant performance targets defining and re-defining the measure making the performance target more

challenging

Behavioural implications of changing performance measuresResistance to change

individuals consider targets unfair or unachievable individual’s pay is involved

Changes are most likely to succeed if they are supported across the entire organisation 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 focuses on the future economic earnings of a

firm, discounted for the cost of capital economic value added cash value added

Reward systems

Processes, practices and systems which are used to provide levels of pay and benefits to employees

Intrinsic rewards intangible, arise from the positive experiences

of being satisfied with performing well

Extrinsic rewards given to employees

Theories of motivation

Herzberg’s theory of work motivation hygiene factors - provide the setting for

encouraging employee motivation, but do not themselves motivate employees

motivators - factors that relate to job content and which provide employee motivation

Cont.

Theories of motivation

Expectancy theory 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) link employee rewards on achieving or

exceeding some performance targets

Employee share plans (share option plans) 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 cash bonuses are paid to each employee, based

on a specified percentage of the company’s profit

Gainsharing 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 individuals are rewarded based on their work,

team exceeding certain performance targets

Individual incentive plans individuals are rewarded for achieving

individual performance targets

Group vs individual performance

Consider the following issues identification with the group equity among employees competitiveness between employees relating individual effort to reward rewarding only good performers

The timing of incentive payments can be crucial to achieving desired outcomes

Exhibit 13.5

Exhibit 13.6