This article is written to provide an answer to a question posed by one of the readers of this blog. He asked me to give example of performance management models and how managers use them to make managerial decisions.
In common parlance, performance management models are those management accounting tools used by management accountants to perform their management accounting functions which is to provide useful information to decision makers. In other words, performance management are those activities that are aimed at improving on already existing processes.
On the other hand, performance measurement tools are techniques used by management to instigate its employees into working hard to achieve organizational goals and objectives.
Four most common examples of performance management models
Balanced scorecard (Kaplan and Norton): balanced scorecard is the first performance management model to introduce the non-financial elements of performance measurement. Read this article for more about balanced scorecard and its application in a specific industry.
Building blocks model (Fitzgerald and Moon): Fitzgerald and Moon’s building block was developed to address performance measurement issues in the service industry. It hinges on three main pillars, namely; dimension, standards and rewards.
- Dimension: this basically deals with things that businesses often measure and includes, profit, competiveness, quality, resource utilisation, flexibility and innovation. The first two elements according to the authors are directly linked to the results set by management while the last four elements of the dimension pillar relates to factors that determine or otherwise influence results.
- Standards: you can think of standards as rules that employees of a company must follow in order to achieve the long term objective of the organization. For the standards to be motivating enough, it must have three important ingredients. These ingredients are; (1) the employees must see the standards as their own, i.e, there must be ownership, (2) the standard must be achievable, (3) all parties must view the standards as being fair and equitable.
- Rewards: in line with valence theory, managers expect to be rewarded not just for doing their job but for doing it right. To be effective, the components of rewards must be clear, concise, motivating and controllable by the employees.
Performance pyramid (Lynch and Cross): in simple term, this model is based on the pyramid structure of a business. Objectives and measures are set from the corporate level and handed down to the departmental level.
At the base of the pyramid, emphasis is placed on the quality of products and services, efficiency and continuous improvements on the delivery method, reducing operational cycle, and minimizing waste.
This is then directly linked to the activities at the middle management level where customer satisfaction, flexibility of operations and being productive is all that matters at this level.
At the business unit level, objectives are split into market and financial. The market aspect of the pyramid deals with the external effectiveness while the financial aspect is focused on internal efficiency.
At the corporate level, the strategic objective of the business is set to align with the mission statement of organization. Every level on the pyramid is measured based on the KPIs that have been pre-set for them in the light of critical success factor of a business.
Performance prism (Neely and Adams): many management accounting theorists, including Neely and Adams have described Performance Prism as the second generation performance management framework can successfully replace the first generation performance management frameworks.
According to the authors, other performance management models focus solely on the needs of very few stakeholders like customers and shareholders. Performance prism is also a two way traffic model which is largely based on the presumption that companies as entities should not be the only stakeholders giving value to other stakeholders.
The authors argue that value should also be expected to flow to an organization first before it will in turn give out value. Shareholders for example should contribute adequately to funding requirement of an organization before expecting any form of return
Through the use of the above performance management models, and other managerial tools like variance analysis and contribution analysis, managements can design effective employee incentive programs that would help organizations achieve her goals, both long term and short term.