4. Strategic Performance Management Flashcards
Performance management…
covers all aspects of a business and is centred around the communication between an employee and their manager to support that employee in helping to fulfil the company’s objectives. This includes setting objectives, reviewing results against budgets and providing feedback.
Purpose of budgets
A key component of performance management is setting a clear budget for the organisation. This should help to achieve the following:
Planning
Responsibility (able to assign to budget holder)
Integrate (parts of the organisation)
Motivate employees and management
Evaluate performance
Negative effects of budgets include
Unrealistic budgets are de-motivational
Slack built in
Short-termism
How to improve behavioural aspects of budgetary control
Allow for participation in the budgetary process
Keeping accounting jargon to a minimum
Making reports clear and to the point
Providing control and information with a minimum of delay
Ensuring actual costs are recorded accurately
Executive pay
The Greenbury Committee in the UK set out principles which are a good summary of what remuneration policy should involve.
Directors’ remuneration should be set by independent members of the board
Bonuses should be related to measurable performance
There should be full transparency of directors’ remuneration
Directors may be awarded shares in the company with limits (a few years) on when they can be sold in return for good performance.
Share options
The UK Corporate Governance Code states that
shares granted, or other forms of remuneration, should not vest or be exercisable in less than three years. They aim to align management and shareholder interests.
The UK Corporate Governance Code states that non-executive directors should not normally be offered share options.
Corporate reporting implications (Share options)
IFRS 2 requires an expense representing the fair value of the options to be recognised over the period from the grant date to the vesting date. See chapter 21 for details.
Integrated reporting…
It is widely thought that there is a gap between the information currently being reported by companies and the information investors need to assess business prospects and value. Integrated reporting aims to bridge this gap by focussing on the non-financial aspects of performance.
This should lead to creation of value, which will support long term success and sustainability.
Integrated Reporting identifies four categories of ‘capital’ which an organisation uses to create value.
Performance measures can then be set around these capitals, and a company’s integrated report will disclose whether these measures have been met
Integrated reporting - The capitals
Economic (funds available and manufactured physical objects)
Human (skills, experience, motivation, values, loyalty and intangible assets such as patents,
copyrights, brand and reputation)
Natural (impact on the natural environment, including water, land, minerals and forests)
Social (relationships with communities and stakeholder groups)
Integrated reporting: Natural capital
The increased importance of environmental issues highlights the importance of natural capital.
Trying to measure and quantify environmental impacts is very complicated and will involve experts such as scientists and ecologists. However, the three key steps in the valuation process are:
Quantify resource use and environmental emissions in biophysical units such as kilograms, litres, etc.
Understand how the resource use or emissions cause changes in the natural environment, e.g. water or air pollution
Value the impacts on people associated with these changes, e.g. impact on health, agriculture or fisheries
Some techniques that may be used to value natural capital include:
Replacement costs (the cost of replacing natural capital with an artificial substitute)
Damage costs avoided (the potential losses due to degradation of natural capital)
Hedonic pricing (the impact that environmental factors have on the market price of certain
goods, e.g. houses)
Contingent valuation (asks individuals their maximum willingness to pay to sustain, improve, maintain, protect or repair natural or environmental resources)
Climate related financial disclosures
In March 2020, the Financial Conduct Authority issued instructions for all UK companies listed on the UK stock market to disclose their carbon risks to investors.
This would include:
Describing management oversight of risks
Explaining how their strategy would cope in different temperature scenarios
Setting out risk management processes
Reporting their progress against targets
