Businesses may appear to be similar, relying on standard business models or reporting structures. But in practice, every business is unique, operating as a distinct configuration of business models, organisational designs and management practices – all working to support a unique business stra tegy. This interplay of ele ments can be even more complex in large multinationals with different business models and organisational structures across multiple geographies. A clear understanding of these elements – and how they align to create shareholder value and translate into action at the employee level – is critical to achieving sustainable business success.

This Perspective describes an effective performance measurement system and explains the important role that this system – along with Finance and HR leaders - plays in creating shareholder value by helping to define business success and translating it into distinct behaviours linked to variable pay programs. What’s more, companies need to communicate these measures and goals and establish a system of evaluation to produce desired results.

In this issue, answers to:

• What is the purpose of performance measurement? 

• What are the five basics of a performance measurement system?

• What are the four I’s of performance measurement?

• What are the additional considerations for global organisations?  

Purpose of performance measurement

In order to achieve sustainable success through business strategy and human capital strategy, every company needs to ask itself two critical questions:

• How do we succeed?
• Are we doing it?
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If a company does not conduct this basic self-analysis and then align its actions with decision making through a performance measurement system, it will inevitably get behaviours that may undermine its future success. Performance measurement systems can serve as a common language – the critical link between business strategy and execution – that defines and clarifies the behaviours that lead to desired outcomes.

When HR helps build this “last mile” of a performance measurement system, by harmonising decisions and actions with performance measures, individuals at every level of an organisation – and within each region and business unit – understand simply and clearly how their individual behaviours affect business results and how these results will be rewarded.

HR and Finance leaders do not need to have all the answers up front when designing a performance measurement system. There will always be gaps, and the system will need to evolve as the business and the environment evolve. However,

failing to at least align the performance measurement system with the business and

human capital strategies can greatly limit a company’s success.

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The five basics of a performance measurement system

An effective performance measurement system, when supported by compensation and communication programs, translates business and human capital objectives into individual actions. When done well, it will:

1. Identify the most important drivers of business performance – what creates shareholder value over the long term 2. Establish goals and aid in target setting 3. Establish accountability by determining the linkage points between people and success measures 4. Track results by working with information provided by these measures over time 5. Diagnose outcomes, help identify potential business opportunities and determine if the key performance measures are still relevant     These five parts of a performance measurement system can be viewed as the link between human capital strategy and business strategy. The system is a multifaceted management tool that focuses on how a business creates value.

Another way to rate the effectiveness of a performance measurement system is to consider what it is not.

A performance measurement system is not:

• Performance management programs

Performance management programs and processes are designed to align an organisation’s goals and values with employees’ individual contributions to business success. Performance measurement, on the other hand, combines an organisation’s financial and shareholder objectives with employee decisions and actions. Performance measurement and performance management should work hand in hand to reinforce the behaviours needed for success, but one doesn’t take the place of the other.

• Financial planning and reporting

While financial metrics developed for planning, budgeting and reporting purposes may be a starting point, and certainly have a purpose, different measures and tools may be needed for HR programs. An effective performance measurement system will align Finance and HR processes to the same business drivers, but it is not essential – or even usually appropriate – to use the same measures for all activities.

• Specific measures or frameworks (for example, economic profit, cash flow return on investment, a balanced scorecard)

Like the financial measures noted above, there are other measures used by management and the investment community to assess a company’s overall performance. However, performance measurement needs to fit the unique needs of each business and be linked to employee behaviour. There is no one-size-fits-all answer or a single measure for everything.

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