Definition
Performance measurement is the process of (a) developing indicators to assess progress towards certain predefined goals and (b) reviewing performance against these measures. Performance measures can be applied to the whole organization or to particular departments, branches, or individuals.
Examples
Financial Measures:
- Return on Capital Employed (ROCE): This measures the profitability and efficiency of a company’s capital investments.
- Residual Income: This refers to the amount of income that remains after the cost of capital has been deducted.
- Economic Value Added (EVA): EVA is a measure of a company’s financial performance based on the residual wealth calculated by deducting the cost of capital from its operating profit.
Non-Financial Measures:
- Delivery Time: The time taken to deliver products or services to customers.
- Customer Retention: The ability of a company to retain its customers over time.
- Employee Absenteeism: The frequency and duration of employee absences within a company.
- Staff Turnover: The rate at which employees leave a company and are replaced by new personnel.
Frequently Asked Questions (FAQs)
What is the significance of performance measurement in organizations?
Performance measurement is crucial for tracking the efficiency and effectiveness of an organization’s operations, ensuring alignment with strategic goals, and driving continuous improvement.
How do financial measures influence managerial behavior?
Financial measures such as Return on Capital Employed may encourage managers to reduce investments to improve short-term performance figures, which could adversely affect long-term company performance.
What challenges arise in linking financial and non-financial measures?
A major challenge is ensuring that non-financial measures, such as customer satisfaction or employee retention, effectively integrate with financial metrics to provide a holistic view of organizational performance.
Why is the balanced scorecard important in performance measurement?
The balanced scorecard connects non-financial and financial performance measures directly to a company’s strategy, providing a more comprehensive and strategic approach to performance measurement.
Can performance measurement be applied to individual employees?
Yes, performance measurement can be tailored to assess the performance of individual employees in relation to defined goals and objectives, providing specific feedback and encouraging personal development.
Related Terms
- Return on Capital Employed (ROCE): A measure of a company’s profitability and the efficiency with which its capital is employed.
- Residual Income: The net income that exceeds the minimum required return on a company’s capital.
- Economic Value Added (EVA): A financial performance measure that calculates the value created beyond the required return of a company’s shareholders.
- Balanced Scorecard: A performance management tool that incorporates financial and non-financial measures to provide a balanced view of organizational performance.
Online References
Suggested Books for Further Study
- “The Balanced Scorecard: Translating Strategy into Action” by Robert S. Kaplan and David P. Norton
- “Performance Measurement and Control Systems for Implementing Strategy” by Robert Simons
- “Measuring Performance: Early Childhood Educators and Leadership” by Jayne Bartlett
Accounting Basics: Performance Measurement Fundamentals Quiz
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