A performance measurement system is a traditional way of keeping track of what goes on in your business. The aim of performance measurement is to help managers and business owners analyse successes and failures of individuals or group of individuals. Successes or failure in this context is a function of the standard that has been set by the management. That is why getting the right yardstick upon which managers are appraised is as important as appraising the business itself.
Performance measurement includes those activities that are carried out by management to ensure that goals and objectives are efficiently, effectively and economically met. Identifying and implementing the right performance measurement is one of such management functions that do more harm than good when not done properly. Adoption and implementation of wrong appraisal method staff can lead to the issue of loosing motivation and this in turn usually tell on the overall productivity of the organization concerned.
The nature of modern day business made it difficult for top management to centrally control operations. Thereby making it necessary for companies to be divided into separate self-contained segments or divisions – where managers are allowed to operate with a high degree of independence. As important as it is to have a sort of performance measure in place to see how these divisional managers are doing, it is much more important to ensure that performance measurement criteria or technique adopted by a company does not in any way affect the overall achievement of goal congruence of a company which include safeguarding the investments and assets of a company.
It should also be noted that financial performance evaluation is not and should not be the only basis of measuring how a divisional manager performed. Other non-financial factors like: level of competition in industry, how competitive a company is quality of a company’s product, level of customer satisfaction, product leadership, legislations, etc should also be considered while evaluating the performance of a divisional manager. This will now smoothly introduce us to the next section of this article which deals with issues revolving around successful identification and implementation of optimum performance measure.
OPTIMUM PERFORMANCE MEASUREMENT SYSTEM THAT ACHIEVE GOAL CONGRUENCE IN AN ORGANIZATION
Performance measure is a key strategic management decision that needs to be handled with utmost care so that goal congruence can be achieved. But wait a minute, I think is the right time to briefly explain what goal congruence is.
WHAT IS GOAL CONGRUENCE?
I simple language, goal congruence is a phrase used to describe a situation where the activities of every individual and group in an organization works towards achieving the common objective of a company, which is the desire of top management. For example, the activity of the marketing manager should not in any way negatively affect the operations of the production manager or the manager that is responsible for raising finance.
FACTORS TO CONSIDER WHEN CHOOSING PERFORMANCE MEASURE
The first factor that we need to consider when setting up performance measures for a company is the organizational structure of the company that we are looking at; are decision makingpowers centralized or decentralised?. There are basically two ways of looking at the structure of an organization. The first is the functional approach while the second is the divisional approach. Performance measures that work perfectly well on one will not work on the other. In as much as this article is not set out to discuss which organizational structure is best, I would like to use this opportunity to state that most of the contents of this article are written from the division-alized perspective of business structure.
The second most important step to take as far as establishing a workable performance measure is concern is to understand the difference between managerialand economic performance. Managers of divisions usually find it disheartening to be judged purely on economic terms when they operate in an unfriendly economic environment. For example, two managers of similar managerial acumen operating in different economic conditions might be judged differently based on the outcome of their division. Similarly, a bad manager that finds him or herself in a favourable economic climate might be seen as a better manager while a fantastic manager who happens to be unlucky working in a harsh atmosphere might be unjustly punished for not performing well.
If the purpose of evaluation is to assess a divisional manager, then only those items directly controllable by managers should be included in the measurement standard. There are occasions when top management would want to evaluate a division’s economic performance for planning and other strategic management reasons. In this instance, measures that capture only items that are controllable by divisional managers would be misleading as it will overstate economics matrix of the division.
The third aspect of performance measurement that must be taken serious when setting up performance measures is the motivational impetus of managers. Managers being different people from different background are being motivated by different stuff. Management accounting researchers and management theorists have come to conclude that finding and maintaining a suitable measure that is challenging enough to motivate managers is a very difficult task.