One of the greatest challenges faced by companies is effectively measuring and rewarding executive performance. Developments over the past year have further heightened the focus on performance measurement in short- and long-term incentive plans, particularly measure selection and target setting.  

Despite the increased scrutiny on performance, many companies continue to struggle with defining and managing their performance measurement system. Much conventional wisdom has developed based on individual experiences, but what works for one company might fail for another. The performance measurement system must reflect each organisation’s unique industry dynamics, business strategy and management style.

In this Perspective, we will examine the seven deadly “sins” that can befall organisations when selecting performance measures and setting targets. You will learn how to avoid these errors by following the “virtues” that lead to the right performance measurement system and the right results.

7 deadly sins

1. Earnings per share (EPS) is the primary driver of shareholder value. 
    
2. Total shareholder return (TSR) is the only performance metric you need. 
    
3. A balanced scorecard is the best framework for measuring performance. 
    
4. If a competitor or peer uses this measure, you need to use it too.
     
5. To be effective, your performance measures must be commonly accepted and well understood by everyone. 
    
6. Your budget and strategic plan are your performance target.
      
7. All senior executives should be rewarded using the same performance measurement programme.

The 7 virtues of performance measurement

1. Identify what you need to accomplish in order to beat the competition and generate sustainable economic profits; design your performance measurement system around those factors.
    
2. Pick internal and external performance measures that accurately reflect the behavious and outcomes you want to achieve, given your company's current strategy and stage of development; revisit them as your priorities change.
    
3. Consider using standard performance measures surch as EPS and TSR, if helpful - but don't rely on just 1 or 2 metrics to assess performance.
    
4. Create a robust target-setting process.
    
5. Make sure your goals and incentives are clearly defined and applied across business units and that they encourage the appropriate balance between collaboration and accountability.
    
6. Be sure your short- and long-term incentive plans are aligned to avoid paying twice for the same performance - or paying high annual incentives year after year without ever reaching your long-term goals.
    
7. Be clear about what specific behaviours you want to encourage and what measurable outcomes you want to achieve.