Chapter 13

1. Chapter 13 Contemporary approaches to measuring and rewarding performance

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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.

8. Measuring performance with a balanced scorecard • Measures 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

9. 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

10. 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.

11. Linking non-financial and financial performance measures • Du Pont chart • shows the linkages between key performance drivers, key performance indicators and financial performance measures

12. 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

13. 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

14. 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.

15. 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

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

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

18. 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

19. Behavioural implications of changing performance measures • Resistance 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

20. 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

21. 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

22. 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.

23. 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

24. 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.

25. 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.

26. 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

27. 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

28. Exhibit 13.5

29. Exhibit 13.6