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


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
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