Executive Summary
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Measuring performance is a fundamental part of every organization, whether it is run by a private sector or a government sector.
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Performance measures are used to evaluate organizational as well as managerial performance.
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A key performance indicator (KPI) is a quantitative value that can be scaled and used for performance evaluation.
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Organizations should use both financial and nonfinancial KPIs when measuring employee as well as firm performance.
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KPIs should be aligned with business strategy, work environment, and employee incentives.
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Too many KPIs should be avoided, to maximize their usage by employees in their day-to-day operations.
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“It is much more difficult to measure nonperformance than performance.”
Introduction
Measuring performance is a fundamental part of every organization, whether it is run by a private sector or a government sector. A performance measurement system (PMS) highlights whether the organization is on track to achieve its desired goals. Performance measures are primarily used to evaluate organizational, as well as employee performance. A PMS develops key performance indicators (KPIs), or metrics, depending on the nature and activities of the organization. KPIs can serve as the cornerstone of an organization’s employee incentive schemes. KPIs are used as guidelines and incentives to facilitate the coordination of managers and business unit goals, with those of the overall corporation goals, that is, they encourage goal congruency. Through these metrics, the organization communicates how it wishes the employees to behave, and how this behavior will be judged and evaluated. Effective organizational managers rely on KPIs to set direction, make strategic decisions, and achieved desired goals.1
It has been suggested that, in today’s competitive and global financial crisis environments, organizations need to be masters at anticipating customers’ needs, devising radical new product and service offerings, and rapidly deploying new production technologies into operating and service delivery processes.2 For several decades, performance measurement has been used as an internal informational tool to evaluate business units’ operations, and make program and budgetary decisions.
PMS and KPIs: Definitions
A PMS typically comprises systematic methods of setting business goals, together with periodic feedback reports that indicate progress against those goals.3 Within a PMS, an organization develops some key performance metrics or indicators. A KPI can be defined as “a quantitative value that can be scaled and used for purposes of comparison.”4 There is also the view that KPIs are quantifiable performance measurements used to define success factors, and measure progress toward the achievement of business goals.”5 The PMS literature classifies performance measures into two major groups: financial and non-financial. Financial measures may include return on investment (ROI), earnings per share (EPS), revenue (sales) growth, profit margin, etc. Non-financial measures may include customer satisfaction, employee satisfaction, production efficiency, quality, customer services, etc.
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