Accounting Business Reporting for Decision Making

CHAPTER 14 Performance measurement 585

14.5 Individual performance measurement

LEARNING OBJECTIVE 14.5 Discuss the issues surrounding individual performance measurement.

There is a well-known saying: ‘Companies don’t succeed; people do.’ Companies are artificial entities

and do not perform any physical function (the company itself brings owners, workers and resources

together under a legal structure). The people working within companies perform multiple tasks, individ-

ually and in teams, to help accomplish the organisation’s goals. Performance measurement at the indi-

vidual level should highlight to the employees what tasks are important. For example, a sales assistant

may be required to assist customers and make sales. Including both tasks in a performance measurement

system helps managers communicate this to the employee. The performance system may include a cus-

tomer satisfaction measure and a dollar sales measure. If only the sales dollars were measured, then the

sales assistant might focus on making as many sales as possible with little regard to customer service

and needs  — and the customer might never return. Such short-term gains would not be good for the

entity in the longer term.

Another consideration of the performance measurement system is the reward system; specifically, the

choice between individual and team-based rewards. Some entities encourage teamwork by including

rewards based on team, department or company-wide performance. Such an approach has the advantage

of encouraging employees to work together and hopefully achieve synergies that individuals could not

achieve working alone. Criticisms of such an approach include the difficulty of managing individuals

who shirk their responsibilities, knowing the team overall will pick up the slack; and managing indi-

viduals within teams who have no incentive to excel individually.

Of special interest under individual performance measurement is executive performance compen-

sation. Some large compensation packages have been reported in recent years. Changes to company

regulations and accounting standards require companies to report on director and executive compen-

sation. Generally, an executive salary package consists of a mix of base salary, incentives based on

achieving certain measurement targets (such as ROI, RI or EVA), stock/share options, and other benefits

such as superannuation, company car and travel. The package could include financial and non-financial

measures, and also encourage both short-term and long-term incentives that help achieve the entity’s

goals. Short-term incentives typically include bonuses for meeting a target.

For example, figure 14.7 illustrates the percentage of fixed and performance-based components

of executive compensation at JB Hi-Fi Ltd. The entity remunerates senior executives by evaluating

‘comparative positions in similar companies and industries and comprises (a) fixed remuneration and

(b) variable remuneration consisting of (i) short-term incentives (annual bonus based on specified perfor-

mance targets as agreed with the executive) and (ii) long-term incentives (options under the JB Hi-Fi

Ltd Executive Share Option Plan)’. The specified performance targets under the short-term incentives

include comparison to budgets, business plans and other qualitative objectives such as corporate gover-

nance, investor relations, succession planning and human capital development.

2015

Salary

and fees Bonus Other^1 Superannuation

Share-based

payments^2 Total

Non-executive directors

G. Richards

J. King

B. Laughton

G. Levin

R.   Uechtritz  

$

269 033

142 466

144 292

127 660

118 721

$ — — — — —

$ — — — — —

$

20 967

13 534

13 708

28 340

11 279

$ — — — — —

$

290 000

156 000

158 000

156 000

130 000

802 172 — — 87 828 890 000

FIGURE 14.7 JB Hi-Fi Ltd — executive compensation (continued)