What are the disadvantages and advantages of performance measures?

Written by helen akers
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What are the disadvantages and advantages of performance measures?
An annual report is a performance measurement that reveals how different divisions of the company contributed to its overall financial health. (Jupiterimages/Comstock/Getty Images)

Performance measures are typically used by organisations to implement and drive strategic objectives. They are also used to reward employees financially and measure if a company is meeting its goals. For many organisations, performance measures are quantitative. Performance is largely determined by financial measurements, which is a disadvantage when it comes to achieving long-term results, adequate levels of customer satisfaction and employee creativity. The idea of implementing qualitative performance measures brings several advantages, including the achievement of long-term organizational goals, higher levels of customer loyalty and enhanced predictions about long-term financial performance.

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Short-term Results

When companies establish certain financial goals, it tends to create an atmosphere where short-term earnings become more valuable than the factors that cause them. For example, sales organisations often set quotas or a specific dollar amount of revenue that needs to be achieved by its staff during a certain period. Since the satisfactory performance of the employees is contingent upon achieving a specific dollar amount, they may become too focused on the objective. The employees may lose sight of their customers' needs and allow service or satisfaction to suffer in lieu of achieving a certain sales volume.

Standardisation

Since performance measures tend to encourage somewhat rigid behavioural outcomes, they might result in a loss of creativity. Employees become focused on modifying their work habits to align with the certain methods and procedures that produce a rewarded outcome. This may discourage employees from experimenting with innovative solutions that might produce a better result. In some cases, performance measures might also encourage unethical behaviour. For example, a sales representative might coerce an account into letting him accumulate excess inventory to meet his monthly sales quota.

Customer Loyalty

Implementing qualitative performance measures alongside financial measurements tends to create a balance between a company's tangible and intangible assets. Measuring items such as service quality and customer satisfaction encourages long-term financial success by increasing levels of customer loyalty. As service levels improve, customers are more likely to continue patronising an organisation. Forming strong relationships between a company's staff and its customers encourages repeat business and might lead to higher levels of employee satisfaction and retention.

Long-term Predictions

A combination of both qualitative and quantitative performance measures provides a better indication of how a company may perform in the long run. While financial measures may indicate a short-term loss for a long-term capital project, measuring the qualitative benefits received from its implementation may indicate potential future profits. Likewise, implementing changes in company procedures, which increase customer satisfaction and acquisition, may lead to increased long-term revenue.

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