CHAPTER 14 Performance measurement 563Chapter 14 preview
This chapter discusses performance measurement. Many aspects of an entity can be measured, including
the performance of the entity as a whole, specific divisions or even individual employees. Linking the
performance measurement system to organisational objectives ensures that the focus is on the goals
of the entity. Contemporary performance measurement systems include a balance between financial
and non-financial measures, and between short-term and long-term measures. There is also a growing
expectation that environmental and social performance should be measured and reported. Such measures
should be simple to apply and understand, and should link the operations with strategy and encourage
beneficial behaviour.
Performance measurement tools covered in this chapter include the balanced scorecard, environmental
and social measures, and financial measures such as return on investment, residual income, and econ-
omic value added. Non-financial performance measures and issues relating to individual performance
measurement are also discussed.
14.1 Organisational performance measurement
LEARNING OBJECTIVE 14.1 Explain the importance of measuring organisational performance and
outline common frameworks and reports used to assess and report organisational performance.
Organisational performance measurement forms part of the overall management process. This includes
developing goals to support the achievement of the entity’s mission, transforming those goals into strat-
egies and then measuring performance. Decisions need to be made regarding the types of business an
entity should be involved in, how the entity can compete within the chosen markets, how the entity
should be structured internally, and what processes can be used to harness resources efficiently and
effectively. The performance evaluation of the efficiency and effectiveness of the entity’s strategies,
structures and processes is integral to the achievement of the entity’s mission.
For example, JB Hi-Fi Ltd’s mission statement focuses on its principal activity: ‘The retailing of
home consumer products, with particular emphasis on consumer electronics, electrical goods, car sound
systems and music, games and movies.’ The company needs to formulate strategies, structure the entity,
and design processes to ensure the efficient and effective use of resources in achieving its mission.
The mission statement or vision is simply a short statement that sets out the overall philosophy and
objectives of the entity. It is normally quite abstract, but concrete goals and measures can be formulated
from it. The design of an entity’s strategies is formulated from the mission or vision statement, which in
turn lays the foundation for the direction and control of the entity’s resources. Performance measurement
helps evaluate the entity’s success and provides feedback for future action. This cyclic process of goal
setting and evaluation helps motivate people and entities towards goal achievement and in adjusting and
refining future goals and practices.
Performance measurement systems could include measures to evaluate the performance of the entity as
a whole, organisational divisions or segments, individual managers and employees, customers, products/
services, environmental and social performance, suppliers or processes. In fact, any aspect that can help
meet the attainment of the entity’s goals can be evaluated.
The whole entity’s performance is monitored in various ways. Chapters 5–8 reviewed the preparation
and presentation of general purpose financial statements (GPFS). The production of the financial state-
ments gives a good evaluation of the financial success of an entity. Financial statements are prepared
based on standards for the purpose of providing general users with financial performance information.
Publicly listed entities produce an annual report which contains the GPFS as well as other key data that
external users can evaluate. Increasingly, entities are also reporting their environmental and social per-
formance in corporate social responsibility reports. The use of the GRI framework for reporting social
and environmental information was discussed in chapter 2.