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Performance Management
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Performance Management
Date 1
Business Growth and Expansion
Business Challenges
Functional Structures
Finance
HRM
Marketing
Operations
Divisions
Divisional Structures
Geographical Perspective
Product Perspective
Decentralization
Delegation of decision-making responsibility
This improves:
Autonomy
Quality of decision-making
Speed of decision-making
Motivation of managers
Agency Costs - Moral Hazard
Goal Incongruence
Costs
Managers may pursue goals that are not in the best interest of the company
Performance Measures
Tools to monitor and control how well the managers are making decisions
Management Solutions
Scope
It includes financial and non-financial measures
The Controllability Principle
Managers should be held accountable only for the results that they can significantly influence
Key Criteria
Controllable
Non-Controllable
Managerial Performance
Economic Performance
Financial Measures
Financial Measures
Return on Investment
Assess how well divisional mangers utilize the resources available to them
Controllable Divisional Profit
x 100
Divisional Capital Employed
ROI
The division is profitable if:
ROI > Cost of Capital
Sandy is managing a division. She gets paid a bonus based on how much her divisional ROI exceeds the company target of 15%.
Her division currently generates profit of £37,500 and she has divisional capital of £187,500.
She can accept a new project returning £15,000 profit for a capital outlay of £90,000
Application
Company's Perspective
Sandy's Perspective
ROI = 17% > Cost of capital = 15%
ROI before project = 20% <
ROI after project = 19%
Residual Income
Dollar amount of income generated in excess of the cost of capital charge
RI
= Controllable Profit - (Capital employed x cost of capital %)
The division is profitable if:
RI > 0
Katie is managing a division. She gets paid a bonus if her RI increases.
Her division currently generates profit of £15,000 and she has divisional capital of £100,000. There is a required return of 10%.
She can accept a new project returning £1,100 profit for a capital outlay of £10,000.
Application
Company's Perspective
Katie's Perspective
RI before project = £5,000
RI after project = £5,100
RI = £100 > 0
ROI
RI
Enables Comparison
Evaluations
Achieves Goal Congruence
Risk-Adjusted Capital Costs
Strategy
Performance Measures
Strategic Performance Management Frameworks
Financial and Non-Financial
Strategy Implementation
Non-Financial Measures
Balanced Scoreboard
By Kaplan & Norton
Performance measures in terms of:
Financial Perspective
The Framework
Customer Perspective
Internal Business Perspective
Learning and Growth Perspective
Airlines Example
Construct a balanced scorecard for a divisional manager at a company of your choice
Your
Turn!
How is it a performance management tool?
Objectives guide performance
Performance Evaluation
Sets a benchmark to evaluate performance
Mechanism for a reward system
Evaluation
Benefits & Costs
Long-term strategic performance measures
Causal linkages between multiple measures are difficult to explain
Multiple perspectives in terms of stakeholders & scope
Absence of a time dimension
Omission of other important perspectives
Limits threat of creative accounting
Good performance measures exhibit:
1. Comparability
Across units of analysis
2. Variability
Same unit of analysis
Performance Paradox
Running down process
The comparability and variability of performance measures erode over time
The Issue
The Performance Paradox
A weak correlation between performance indicators and performance itself
*Meyer & Gupta, 1994
4 Processes
Perverse Learning
Suppression
Positive Learning
Selection
Causes
*Meyer & Gupta, 1994
Solving the Paradox
Control is best achieved through multiple, uncorrelated and changing performance measures that render it difficult to know exactly what performance is
Solutions
Goal-Setting Theory
*Locke et al.
There is an important relationship between the way employee performance objectives are set and their performance
Performance Boost
Effective goal-setting principles:
Clarity, Challenge, Commitment, Feedback, Complexity
Compare the impact of functional and divisional structures on organisational control and decision making
Critically evaluate key financial methods for performance measurement used by organisations
Learning Outcomes
Explain the benefits to managers of using both financial and non-financial performance measures
Explain the impact of performance measurement systems on management behaviour and performance
Question 1
Choose two financial ratios and critically evaluate the insight they can provide on firm performance.
Exam Questions
Question 2
Critically evaluate three possible tools that a manager could use to analyse the performance of their department. Which do you think would be the most useful?