Performance Management System - The Key Performance Indicators

Organizational control practices have evolved inhas been argued that employees will become
line with the changes in both the external andmore committed and have the motivation to
internal business environment. However, the mainachieve their stated objectives if their activities
issue of the traditional management controlare measured, reported and subsequently
system, i.e. ensuring the organizational membersrewarded or penalized based on their
act in the best interest of the organization, stillachievements against the set targets and
remains at the heart of the current performanceindicators. Performance evaluation will be more
management system. In contrast to the traditionalobjective and fairer as it would lead to a reduction
control system which focuses only on accountingin employee manipulation.
control and ignores the strategic and operationalThe setting of targets and indicators for key
control, the performance management system isorganizational activities will result in performance
a more integrated system and it encompassesbeing more transparent and subsequently
the following key areas :becoming more amenable to control. Key
1. Evaluation of performance against the keyperformance indicators are therefore needed to
objectives which are deemed to be central to thetranslate strategic plans into specific initiatives, and
organizational success.to allocate responsibilities and accountability to
2. The measurement of the organization's processthose who will be responsible for achieving the
and activities that are implemented to achieve itstargets set for those initiatives. KPI's are also
plans and strategies.crucial to the operationalization of the strategic
3. The setting of appropriate targets and level ofplans. Hence an organization's strategic
performance require to achieve objectives (1) andperformance can be monitored through the use
(2) above.of KPI's.
4. The rewards and penalties given to employeesThe use of KPI's will provide the link between
for their success or failure in meeting the setfinancial performance and strategic
targets.decision-making, and subsequently they will
5. The feedback from the system is aprovide an input into the resource allocation
requirement to ensure that the organization learnsprocess and influence the organization's portfolio
and adapts to the current environment.management process. The reporting of KPI's will
These key issues on performance managementserve as an early indicator of which businesses
systems complement various other managementneed particular attention, and it will indicate how
tools such as, value based management, balancedeach unit will contribute to the value creation of
scorecard and the use of otherthe whole organization.Therefore, the use of KPI's
performance-based measures, like economic valuein various organizational processes will provide the
aded (EVA), economic earnings (EE) and otherlinkage between day-to-day activities and
measures. For example, all the issues addressed indecisions to the overall financial performance of
the framework are encompassed within the valuethe company.
based management system.Although utilizing KPI's is deemed to be beneficial,
It should be noted that the heart of the newseveral case studies researched have shown that
performance measurement system lies in the usethe implementation of KPI's is problematic. There
of key performance indicators (KPI's) in variousare various pitfalls faced in the organization - from
organizational processes and activities such as inthe initial tasks of formulating the key indicators
employee compensation, strategic evaluation andand its associated targets, to the measuring of
in the budgeting and planning process. Hence,performance and the rewarding of managers
standards and targets need to be set for thesebased on their achievements against these
key activities. The underlying philosophy of thetargets.
system is "what gets measured gets done". It