Performance Measure Critique
Introduction
Finance is the lifeblood of any business, be it as initial capital investment during the start-up phase, or regular revenue generation once the business is operational. This cash inflow takes place through the sale of high quality products and services. However, neither finances nor products/services exist on their own, and instead depend on the human resources who make critical decisions pertaining to their most lucrative usage that reaps maximum growth and profitability for the business. The Finance Head decides the company’s debt-equity composition and takes key investment decisions. The Production Head decides the quantity of production based on current and estimated future demand figures provided by the Sales & Marketing Head, who proactively tries to bridge the gap between the products/services and the customers through advertising and sales promotion efforts. All these different activities have a common goal of revenue generation, whose attainment depends on the human element, since a key financial decision-maker is required to ensure the efficient circulation of funds in the company. Similarly, production can come to a halt if the annoyed workers go on a strike/lockout. Finally, the products also would remain unsold if there are no buyers, who again are human beings only.
Thus, the actual performance report card of any business organization should reflect its accomplishments in the three areas of human resources, finance & product/service. However, for the purpose of this research paper we have tried evaluating only two of these performance areas, namely, human resources & finance against the following selected measures:
Human Resources Measures
1. Performance Evaluation - Performance evaluation involves a periodic assessment of an employee’s performance by his manager, with a view to track his current progress and suggest ways to improve it further. The employee also gets an opportunity to voice his grievances openly, since the communication here is one-on-one between both the parties, thereby, increasing the relevance of the entire process.
“A properly carried out performance evaluation can go a long way in completely transforming an otherwise mediocre employee him into an asset for the company by providing him with a perspective ignored previously” (Gross, 2012)..
However, it needs to be timely and accurate in order to yield maximum positive results. Accuracy refers to an impartial employee work assessment devoid of any bias or prejudice against him or her. On the other hand, timeliness means the frequency with which it is conducted, whether annually or biannually. It also means the promptness in communicating the results so that the employee gets time to introspect his job performance and improve it and the company also has sufficient time to observe him both pre and post appraisal.
Planning like all other functions of management forms the basis for performance evaluation also. The job description of an employee defines both his duties and responsibilities and what the company expects from him, serving as his performance standards. During the actual exercise the employee is assessed against each of them. The points earned provide a snapshot of the discrepancy or the gap between actual and desired performance, the reason for which is openly discussed with the employee, and suitable actions or controls like providing additional training etc. are exercised to ensure that such performance lacunas don’t arise in the future. Thus, without planning or designing the standards of performance, it is not possible to exercise control over them, since one would be astray as to how the performance is faring.
2. Productivity Reports - “Productivity means how effectively an organization converts the available resources into profitable goods and services” (Alessio & Pickrum, 2011). It is reported and measured using Key Performance Indicators (KPIs) that highlight the level-wise contribution of all employees throughout the organization and provide a bird’s eye-view of the internal effectiveness and efficiencies of the business operations, thereby, unearthing areas of improvement.
Here also the time factor is critical since a productivity issue that goes undetected or simply ‘hid under the carpet’ manifests itself into a bigger problem, necessitating drastic extreme measures, which is always undesirable as compared to a scenario wherein departmental productivity reports are frequently generated and the concerned employees are counseled and mentored by their managers before the problem takes an unmanageably gigantic form.
Such planning and control takes place in case of manufacturing process also. For example, in a plant manufacturing soda bottles, there are fixed production standards with respect to quality of plastic used and the shape and size of the bottle that comes out of the facility as well as the tolerance level for defective number of pieces. Any deviation from these set standards are regularly studied by the engineers using the P- chart and C-chart which are nothing but control charts tracing the production activity in a graphical fashion, specifying the % age of defective pieces in each sample and number of defective units in each sample set , respectively. Whenever, the defectiveness in production exceeds these tolerance limits, the team is alerted and immediate control measures such as changing the supplier repairing the machinery etc. are taken.
3. Employee Turnover & Absenteeism - Employee turnover is the rate at which employees leave the organization. Whereas, absenteeism is an employee’s frequent and prolonged absence from workplace, even though he is still employed. Both of them adversely affect organizational productivity by hampering the workflow and increasing costs. Further, they also present the company in a bad light, as a “least preferred employer” in the job market.
Similarly, constant absenteeism from work should be discouraged from day 1 by clearly communicating the “HR House Rules” during orientation along with the disciplinary action that could ensue in case of non-compliance. Additional efforts involve strict monitoring of the attendance system and introducing controls such as additional pay rewarded every month for 100% attendance and severe penalty imposed for inexcusable absence. Whatever the plan of action, it should be effective enough to curb both the negative behaviors and serve as an example for each employee.
4. Employee Satisfaction Surveys - Increased job dissatisfaction as a prime cause for high employee turnover, absenteeism and other negative behaviors, have made the companies resort to employee satisfaction surveys - an exercise involving administering questionnaires to the employees anonymously and candidly seeking their responses about the organization and work-related questions.
The anonymity underlying this process is very beneficial, allowing the employees to give honest responses without the fear of being reprimanded by the management. However, the flip-side is that the employees need to be convinced that their answers would remain strictly confidential and won’t be used for anything else except workplace improvement.
Further, for desired results such an assurance should be immediately followed by “walk the talk” management behavior i.e. they are useful only if immediate action is taken or at least the process gets initiated in a timely fashion, soon after the feedback is received, instead of waiting for months, which causes the entire enthusiasm behind the process and employee expectations for something better to die out.
Apart from immediately acting upon the survey results, another way to control such survey results is to empower employees to actively participate and openly communication in the improvement process by not only offering their valuable suggestions, but also fearlessly pin-pointing the name of any one acting as an impediment in the developmental process, with full assurance of support from the management.
Financial Measures
1. Profitability - Profit maximization is the sole aim of any business entity that is essential for its sustenance in the long-term. “Profit or bottom-line is the money a business earns after deducting all expenses from the gross revenue figure during the fiscal year. It decides the present sustainability of the business. Another related concept of profit margin represents the cost incurred by the company to become profitable. Expressed as a % age of the gross revenue figure, it depicts the overall financial health of the company and its long-term sustainability” (Gartenstein, 2012). Higher the profit margin, lower the capital required to be reinvested into the business, which is good.
“The most important measure regulating financial planning and control in a company is the budget, since it contains both costs and operating profit figures, that act as performance measures in their own right, by not only dictating operating constraints for the whole organization, string-pulled by the finance department, but also for individual departments and operation managers, thereby, monitoring and controlling the operating performance also” (Neely & Najjar, 2002).
2. ROI & Market Share - ROI or Return on Investment indicates the benefit of an investment, expressed as a % age of its cost. “It provides a quantitative basis for evaluating the lucrativeness of variety of investment decisions, be it inter or intra-company, thus, helping an average investor make a well-informed choice.
“Market share or the % age of an industry or markets total sales controlled by a particular company over a specified time period” (Investopedia ULC, 2012), is more useful than ROI, since it provides a measure of a business’s performance in relation to its competition” (Fast Company, 2005). “The Profit Impact of Market Strategy (PIMS) analysis developed at General Electric in 1960s confirms the positive impact of such marketing strategies on business success, the most important being an increase in business profitability or ROI with a higher market share” (Tutor2u, 2012).
“However, these short-term benefits of market share are not similar to the long-term opportunities that market share presents to improve profitability, since, in the long-term the market share goals change from getting a strong hold on the market to controlling the purchase/sales ratio, which is a critical cost factor, and tends to increase as a result of four controlling variables, namely, selling prices, vertical integration, product/process efficiencies & supplier discounts, which increase the purchasing costs, thereby, highlighting the strategic importance of market share which makes the task of selecting and targeting the right markets, as most critical for marketing and strategic planning” (Ailawadi, Farris, & Parry, 1993) .
Ailawadi, K., Farris, P. & Parry, M. (1993). Market Share and ROI:A Peek at Some Unobserved Variables. Retrieved from http://www.msi.org/publications/publication.cfm?pub=359
Alessio, C., & Pickrum, J. (2011). Productivity Reports: Not What You're Doing - What You're Producing. Retrieved from http://www.pdnseek.com/HealthWire/Productivity-Reports-Not-What-You%E2%80%99re-Doing-.aspx
Gartenstein, D. (2012). Profit Vs. Profit Margin. Retrieved from http://smallbusiness.chron.com/profit-vs-profit-margin-10684.html
Gross, B. (2012). The Importance of Timely Performance Reviews. Retrieved from http://www.allbusiness.com/human-resources/workforce-management-employee-records/11334-1.html#axzz20aReDf6M
Investopedia ULC. (2012). Definition of Market Share. Retrieved from http://www.investopedia.com/terms/m/marketshare.asp#axzz20klHYgX3
Tutor2u. (2012). Market Analysis - The Importance of Market Share. Retrieved from http://tutor2u.net/business/marketing/market_analysis_marketshare_importance.asp
Neely, A. & Najjar, M. (2002). Linking Financial Performance to Employee and Customer Satisfaction. Retrieved from http://catdir.loc.gov/catdir/samples/cam034/2002283000.pdf
