Performance Measurement Trilogy
Defining and measuring organisational performance is complicated. Then, as many an experienced RemCo Chair will confirm, it is even more complicated to design incentive plans that seek to allocate or apportion reward to senior executives on the basis of their contribution to organisational performance.
Why even bother? Why not simply follow the private equity model of basing reward on growth in enterprise value? That may indeed work for the ‘owners’ of a business, who want a decent return on their investment. But books, and even small libraries, have been dedicated to the extent to which this may ignore the interests of other stakeholders.
This also ignores the critical importance of defining with clarity the organisational ‘performance model’ – the means by which leaders explain to managers and employees how they actually define ‘performance’. Without a clear, widely shared and widely understood definition of the organisational performance model, any notion of ‘performance-based reward’ will fall on stony ground.
So, on what basis and from what perspective should we look at performance measurement?
- Is it from the perspective of an investor? (Less often now the cigar-smoking, waist-coated caricature of a bygone era – but increasingly the pension savings on which many employees depend for their survival in later life!)
- Is it from the perspective of the KPIs that underpin the business model? These KPIs define superior management performance and act as an appropriate basis for linkage to higher levels of reward – throughout the organisation. (So how are these KPIs reflected in the performance measures that are used (and abused) in incentive plans?)
- Is it from the perspective of the broader demands of society – as encapsulated in the widely used (and often ill-defined) ESG acronym – to advance the critical environmental, social and governance challenges faced by businesses?
The PARC concept of the ‘Trilogy’ was of course developed from the view that any such choice between these three perspectives is unrealistic and undesirable. Our idea of running a trilogy of events on ‘Performance Measurement’ was conceived against a background of diverse and rapidly evolving perspectives about what and who a company is for.
The complexity of the tension between shareholders and executive managers, which the wave of corporate governance reforms in the 1990s and beyond were intended to address, has been enhanced by a broadening and deepening of the concept of corporate governance. This now holds both directors and shareholders accountable not only for the financial performance of the company, but also for its broader societal and environmental impact.
Related concepts, such as corporate purpose and social licence to operate, have added entire new dimensions to the concept of a company, what it exists for, and who it is there to serve. By extension, this changes the entire basis on which company performance is measured – performance for whom and against what criteria?
PARC’s Performance Trilogy consisted of:
- Our first event focused on how investors and other external bodies define financial performance. The notes from that session are available here.
- The second explored the use (and abuse) of financial performance measures in annual and longer-term incentive plans. Notes available here.
- The third turned attention to non-financial performance measures – and in particular, the extent to which Environmental Social and Governance (ESG) criteria should be used to create focus on and reward a company’s social impact and environmental sustainability. These notes are available here.
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