Business

Why Multiple Performance Measures Are Required

There is danger in undue fixation on a single measure of performance whether for the entire company or for its individual divisions. The result may be emphasis on improving the components of the one measure (e.g., return on capital employed) to the neglect of needed attention to other desirable activities — both in the short- and long-run. Accordingly, many well-managed companies use multiple performance measures.

multiple performance measuresOne company using multiple performance measures for divisional performance rating describes its method as a quantification of progress against agreed upon standards and feels that it provides good, prudent measures of operating results. Each year common standards are adopted by agreement of divisional managers and corporate management. Points are assigned to standards, reflecting those areas determined by management which require special attention in each division.

The Multiple Performance Measures are done generally in three broad areas :

1. Profits for the current year are compared to the profits for the preceding year in absolute dollars, margins, and return on capital employed.

2. Profits are compared to the budget.

3. Cash and capital management measures are employed Here, the emphasis is on effective management of inventory and receivables.

The claimed advantages of multiple performance measures are that:

1 Performance of division managers is more fairly measured than would result from using solely a return-on-capital-employed figure.
2 Management can readily see those divisions which are performing well and those divisions which are not performing so well.

3. Lost points serve as ‘Red Flags’ by directing management s attention to areas requiring attention and to the reasons and correcting actions taken or needed.
4. The system has flexibility as to timely, needed shifting of management emphasis.

Company management in this example concludes that it is not enough merely to tabulate performance statistics. The results must be effectively communicated, corrective action must be taken, and good performance must be rewarded. The system must also have the interest and support of division and corporate management.

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