Thinking: is there one single perfect indicator that a firm can use to measure its performance?

AuthorMerchant, Kenneth
PositionINFORM

Managers need good measures to monitor the performance of their businesses and motivate their teams to act in the best interests of their organisations, but what constitutes a good measure? First, it should properly reflect the entity's goals. For instance, when value creation is the main objective, the indications should improve if value is created and deteriorate if it is destroyed. A good measure should provide instant feedback, as waiting can be costly - and demotivating for those on performance-related pay. It should be accurate and free from bias and noise. It should also be influenceable, understandable and cost-effective. Any measure that fails to satisfy all six of these criteria will be problematic.

Do perfect measures exist? Sure they do. In a highly constrained scenario

where a simple task is performed we can gauge what people have done to create value for their business. For instance, monitoring the number of parts an employee has assembled to a given standard provides a perfect measure, satisfying all of the criteria above. But the situation is rarely this simple - people generally perform multiple tasks.

At managerial level, companies use summary measures of aggregate performance, using monetary terms such as profits, accounting returns and market returns, but none of these is perfect on its own. Market measures, reflecting changes in the value of a plc, seem to be a good choice, especially where they can be refined by controlling for the market's overall movements. For example, an increase of 20 per cent in a firm's market value at a time when the market has risen by 5 per cent represents outstanding performance. But only a few people at the very top of the hierarchy will have any significant influence on this. Such measures say little about the performance of others in the business.

Accounting measures such as profits and returns offer some significant advantages. They are able to reflect the performance of any specific...

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