Contemporary approaches to measuring and rewarding performance
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Transcript Contemporary approaches to measuring and rewarding performance
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
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 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
customer perspective
internal business processes
learning and growth
Cont.
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
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 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
selecting relevant performance targets
defining and re-defining the measure
making the performance target more
challenging
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
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