Performance management Flashcards
From top management: Is the company under control?
- The structure is in place
- Responsibilities are assigned to managers
- Transfer pricing methods are chosen and implemented
> Evaluate whether it works - performance management
Three basic components of the management performance process
- Define important measures
- Set standards/targets for the measures to be able to judge whether actual performance is good enough
- Reward people
Measures
What gets measured gets done
If everything is measured, nothing gets done
- Financial
- Non-financial
- A decision must be made about what measures:
- To follow-up regularly
- To include in a performance report
- Basis for performance evaluation
Two types of performance measures
Lagging (outcome)
- Historical
- Financial
Leading (drivers)
- Relates to the means to reach future profitability
- Future
- Non-financial
Criteria for choosing measures (1)
- Representational criteria: How well a measure captures individual events or units in a striking manner
- Congruence between the measure and the business - Measurement systems criteria: the quality of how the data for the measure is captured, transformed and used
- Comparability
- Resources needed - User critera
- Acceptance
- Simplicity
- Understanding
- Controllability
Validity – is the metric valid, does it measure what we want?
Reliability – measuring the same things every time?
Criteria for choosing measures (2)
Measures can have varying time frames and target different parts of the business
Horison 1: Current business
- Cover actions relevant to defending and developing core business
- Financial and non-financial metrics
Horison 2: Emerging business
- Cover actions taken to build emerging business
- Financial and non-financial often linked to sales and marketing
Horison 3: New business
- Cover actions to create opportunities for new business
- Non-financial
Performance management: Standards
Standards are the basis against which actual performance is compared
Different types of standards
Predetermined
- Negotiated (e.g budget)
- Continous improvements
- Model-based (theoretical)
Internal or external benchmarking: standards derived from the performance of other responsibility centres or of other companies in the same industry
Critique of budget
- Time-consuming
- Quickly becomes outdated
- Constrain responsiveness and flexibility
- Focus on cost reduction and not value creation
- “Santa Claus or handbrake”-effect
- Vertical command and control
Benchmarking
- New trend internationally
- Judged on how well performance compares with internal or external peers in the same industry
- Highly motivating since employees will not know whether they have succeeded until period is over
- No predetermined standards needed, on-demand allocation of resources
- BUs becomes more entrepreneurial
- Potential problem: hard to find data and rivalrous behaviour
Performance management: Reward systems
Performance evaluation are important for motivation and congruence but not enough - need reward systems!
Two different views on bonuses
Finance - good if they are large compared to CEOs personal economy according to research
Management - Not work, no causal evidence between bonus and company performance
Two theories about rewards
Agency theory (Economics - the economic man)
- Driven by self-interest
- Utility maximizer
- Ignores intrinsic motivation
Motivation crowding theory (Psychology and sociology)
- Extrinsic and intrinsic motivation
- The task/fulfilling the task might be motivating in itself
Agency theory
- Principal vs agent
- Asymmetric information is exploited by agent to shirk, hide actions, manipulate
- Motivation derives solely from agents self interest
- Design reward system to align agents self-interest with principal interest - bonuses, monetary rewards or stock options
Motivation crowding theory (Extrinsic motivation)
Extrinsic motivation
- Including the satisfaction from what you get if you reach the goal
- Satisfy needs indirectly
- Relates to external needs
- Driven by factors such as money, status, power, promotion
