Nonfinancial and Multiple Measures of Performance
- 1. Nonfinancial and Multiple Measures of Performance Chapter 18 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
- 2. Beyond the Accounting Numbers L.O. 1 Explain why companies use nonfinancial performance measures. • Often not useful in identifying the cause of operational problems • Commonly reported only on a monthly, quarterly, or annual basis • Many people in the organization do not see how their work translates into financial results. 18 - 2
- 3. Nonfinancial Measures LO1 • Nonfinancial measures direct employees’ attention to those things they control. • In the case of a desk clerk at a hotel, measuring the clerk's performance in terms of customer satisfaction would be meaningful 18 - 3
- 4. Responsibilities According to Level of Organization L.O. 2 Recognize the reasons why performance measures differ across levels of the organization. • Stakeholders: Groups or individuals, such as employees, suppliers, customers, shareholders, and the community, who have a stake in what the organization does. • Business model: Description of how different levels and employees in the organization must perform for the organization to achieve its goals. 18 - 4
- 5. Multiple Measures or a Single Measure of Performance? L.O. 3 Understand when the use of a single measure or multiple measures of performance is appropriate. Single Measure Profit 18 - 5
- 6. Multiple Measures or a Single Measure of Performance? LO3 Multiple Measures Employee satisfaction Employee learning Branch costs Customer satisfaction Regulatory violations Branch profitability 18 - 6
- 7. Balanced Scorecard L.O. 4 Understand how the balanced scorecard helps organizations recognize and deal with their opposing responsibilities. • Balanced scorecard: Set of performance targets and results that show how well an organization has performed in meeting its objectives relating to its stakeholders 18 - 7
- 8. Continuous Improvement and Benchmarking L.O. 5 Understand how to apply the methods involved in an effective performance measurement system. • Continuous improvement: Continuous reevaluation and improvement of the efficiency of the organization’s activities. • Benchmarking: Continuous process of measuring a company’s own products, services, and activities against competitors’ performance. 18 - 9
- 9. Nonfinancial Measures L.O. 6 Identify examples of nonfinancial performance measures and discuss the potential for improved performance resulting from improved activity management. Customer Satisfaction Measures Quality control Delivery performance Bookings and purchase orders Market share 18 - 10
- 10. Nonfinancial Measures LO6 • Quality control: Increase customer satisfaction. • Delivery performance: Deliver goods and services when promised. • Bookings and purchase orders: A decrease in booking and purchase orders sends a signal to management to devote more marketing effort to sales. • Market share: If the market is growing faster than the company's sales, the company is, in effect, experiencing a decline in sales. 18 - 11
- 11. Nonfinancial Measures LO6 • Functional performance measures keep processes efficient and effective. • Manufacturing cycle time: Time involved in processing, moving, storing, and inspecting products and materials. • Manufacturing cycle efficiency: Measure of the efficiency of the total manufacturing cycle; equals processing time divided by the manufacturing cycle time. 18 - 12
- 12. Nonfinancial Measures LO6 • Productivity focuses on the efficient conversion of inputs into outputs. • Partial productivity measures express the relation between output and only one input. Output (quantity or value) Single input such as labor (quantity or value) 18 - 13
- 13. Employee Involvement L.O. 7 Explain why employee involvement is important in an effective performance measurement system. • Many managers believe that when workers take on real decision-making authority, their commitment to the organization and its objectives increases. 18 - 14
- 14. Employee Involvement • When decision-making responsibility lies with workers closer to the customer, workers are more responsive to customer concerns and can make informed decisions. LO7 • Giving decision-making responsibility to workers uses their skills and knowledge and motivates them to further develop those skills and knowledge in an effort to improve the organization’s performance. 18 - 15
- 15. Difficulties in Implementing Nonfinancial Performance Measurement Systems LO7 • Fixation on financial measures • Reliability of nonfinancial measures • Lack of correlation between nonfinancial measures and financial results 18 - 16
- 16. End of Chapter 18 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Editor's Notes
- #2: In previous chapters we discussed financial performance measures to evaluate employee performance. In this chapter we will discuss nonfinancial measures.
- #3: Financial measures can be easily quantified and can motivate employees to improve the company’s accounting profits. Also, shareholders and the business press often focus on financial measures. Therefore, financial measures get the attention of managers. Unfortunately, financial measures are often neither useful in identifying the cause of operational problems nor do they provide timely feedback on performance because they are commonly reported only on a monthly, quarterly, or annual basis.
- #4: Nonfinancial measures and directs employees’ attention to those things they control. Consider a desk clerk at a hotel. Should the clerk be evaluated on the company’s profit or the customers’ satisfaction? The clerk does not have much control over the company’s profit but has a huge impact on customer satisfaction. Evaluating the desk clerk on customer satisfaction directs the employee’s attention to something he or she can control.
- #5: People at different levels in the organization have different responsibilities. Consequently, the performance evaluation system should measure different things at different levels in the organization. The business model links the roles of various employees and levels in the organization and illustrates the way that successful completion of these roles results in achievement of the organization’s goals.
- #6: Given the business model for JYC Investments, what performance measure or measures should be used to evaluate the branch manager? A single measure, profit, is relatively simple to compute and reflects the ultimate goal.
- #7: An alternative might be for the company to use multiple measures that reflect performance associated with two or more of the factors in the business model. Using multiple measures, JYC evaluates the branch manager not only on the end result, profit, but also on how the profit was earned. A branch manager’s decisions can be influenced by the components of the performance evaluation system.
- #8: One structured approach to implementing a set of performance measures is the balanced scorecard. The balanced scorecard is a set of performance targets and results that show an organization’s performance in meeting its responsibilities to various stakeholder groups, such as employees, suppliers, customers, business partners, the community, and shareholders. The concept of the balanced scorecard is to measure how well the organization is doing in view of those competing stakeholder concerns.
- #9: There are four scorecard views or perspectives: financial, customer, internal business processes, and learning and growth.
- #10: Continuous improvement is a philosophy that many organizations are utilizing to meet their responsibilities and evaluate performance. It means continuously reevaluating and improving the efficiency of the organization’s activities. Benchmarking involves identifying an activity that needs to be improved, finding who is the most efficient in performing that activity, studying their process, and then utilizing that process in the organization.
- #11: Nonfinancial performance measures must be based on the organization’s responsibilities, goals, and strategies, which are likely to be different for each organization. Customer satisfaction measures are clearly important to the success of any organization and might reflect the organization’s performance on several internal factors, including quality control and delivery performance.
- #12: Other nonfinancial performance measures include booking and purchase orders as well as market share.
- #13: Functional performance measures are also important for an organization and relate indirectly to customer satisfaction. Manufacturing cycle time is the time involved in processing, moving, storing, and inspecting products and materials and manufacturing cycle efficiency measures the efficiency of the total manufacturing cycle. Manufacturing cycle efficiency is calculated as processing time divided by the manufacturing cycle time.
- #14: Productivity performance measures focus on the efficient conversion of inputs into outputs. Partial productivity measures express the relation between output and only one input.
- #15: One advantage of nonfinancial measures is that employees directly involved in operations are likely to understand the operation. By computing and reporting nonfinancial measures, the organization benefits by encouraging these employees to participate in performance improvement activities. Successful managers know that workers have good ideas for improving operations.
- #16: When decision-making responsibilities lies with workers closer to the customer, workers are more responsive to customer concerns and can make informed decisions. Giving decision-making responsibility to workers uses their skills in an effort to improve the organization's performance.
- #17: There are several difficulties in implementing nonfinancial performance measures, for example: emphasis on financial measures, the issue of reliability of nonfinancial measures, and the lack of correlation between nonfinancial measures and financial results.