Implementing an effective global performance measurement system

In this issue, answers to:

Why is an effective performance measurement system important?
How can a performance measurement system motivate individuals and drive desired business and human capital results?
What are the key features of a well- executed performance measurement system?
How can companies determine whether a group-wide, regional or local approach is most appropriate?
What are the potential outcomes and benefits from an effective performance measurement system?

What is a performance measurement system?

A performance measurement system is a structured process for determining the success of an organization against defined performance benchmarks. The process usually involves setting and measuring financial and
non-financial indicators on a regular basis, in order to support an organization’s unique business strategy. Measurements can range from annual earnings targets to achieve company growth goals to weighted sets of
financial and non-financial, absolute and relative, short-, medium- and long-term measures that align with the goals and strategies of different units within a complex organization.
Implementing an effective organization performance measurement system
On the surface, many businesses may appear to be similar, relying on standard business models or reporting structures. But in truth, every business is unique, operating as a distinct configuration of business models, organizational
designs and management practices, all working to support a unique business strategy. A clear understanding of these elements – and how they align to create shareholder value and translate into action at the employee level – is
critical to achieving sustainable success.
This need is all the more important in Asia today, where many companies and conglomerates reflect an even greater array of different business models and organizational systems across multiple geographies. Without a shared
understanding of business objectives, each business or geographical unit might focus on different priorities and have different views on how to create shareholder value.
In the face of these challenges, performance measurement systems can serve as a common language – the critical link between business strategy and execution – that defines and clarifies the behaviors that lead to sustainable
success.
This Perspective describes an effective performance measurement system and explains the critical role this system and HR leaders play in creating value for shareholders by helping to define business success, translating it into
distinct behaviors linked to variable pay programs. Often, many organizations stop at this point, but to derive an even greater return on investment, companies must also communicate these measures and goals and establish a
system of evaluation to produce results. When HR helps build this “last mile” of a performance measurement system, individuals at every level of an organization – and within each region and business unit – understand simply
and clearly how their individual actions affect business results and how these results will be rewarded.
Purpose of performance measurement
In order to achieve sustainable success, every company needs to ask two critical questions:
1 What do we need to do to win?
2 Are we doing it?

If a company does not conduct this basic self-analysis and then align its actions with decision making through the performance measurement system, it will inevitably get behaviors that undermine its future success
(see Exhibit 1).
Keep in mind that HR and Finance do not need to have all the answers up front when designing a performance measurement system. There will always be gaps, and the system will need to evolve as the business and the
environment also evolve. However, failing to at least directionally align the performance measurement system with the business and human capital strategies can greatly limit a company’s success.
Performance measurement system basics
 An effective performance measurement system, when supported by compensation and communication programs, translates business and human capital objectives into individual actions. When done well, it will:
 Identify the most important drivers of business performance – what creates shareholder value over the long term
 Establish goals and aid in target setting
 Establish accountability by determining the linkage points between people and success measures
 Track results by working with information provided by these measures over time
 Diagnose outcomes, help identify potential business opportunities and determine if the key performance measures are still relevant
 These five parts of a performance measurement system can be viewed as the nexus between human capital strategy and business strategy (see Exhibit 2). It’s a multifaceted management tool that focuses on how a
business creates value.
 Another way to understand the effectiveness of a performance measurement system is to consider what it is not. A performance measurement system is not:

Performance management programs - Performance management programs and processes are designed to align an organization’s goals and values with employee development and motivation priorities. Performance measurement,
on the other hand, combines an organization’s financial and shareholder objectives with employee decisions and actions. Performance measurement and performance management should work hand in hand to reinforce the
behaviors needed for success, but one doesn’t take the place of the other. Financial planning and reporting - While financial metrics developed for planning, budgeting and reporting purposes may be a starting point and certainly
have purpose, different measures and tools may be needed for HR programs. An effective performance measurement system will align Finance and HR processes to the same business drivers, but it is not essential – or even usually
appropriate – to use the same measures for all activities.
Specific measures or frameworks (for example, economic profit, cash flow return on investment, a balanced scorecard) - Like the financial measures noted above, there are others used by management and the investment community
to assess a company’s performance overall. However, performance measurement needs to fit the unique needs of each business and be linked to employee behaviors. There is no one-size-fits-all answer or a single measure for
everything.
The four I’s of performance measurement
An effective performance measurement system is built on a solid foundation addressing the following four elements, one building upon the next:
1. Information
All performance measurement systems need to provide fundamental information about the business and what it takes to create shareholder value. This is especially true for a large, complex and international
organization, since the answer may not be the same for each line of business or each geography within the company.
2. Insight
Performance measurement systems enable companies to convert information into insight about the alignment between the human capital strategy and the business strategy. By identifying and prioritizing the
measures of success, the firm will understand how it creates value for shareholders, the actions it needs to take and the performance measures it should adopt to generate desired business results. Mercer
3. Impact
Performance measurement systems support HR programs through target setting and establishing accountability; they turn information and insight into impact by creating shareholder value. However, as not all
businesses within a large, complex firm have the same opportunity or impact, the HR programs will need to tailor performance measures appropriately to the different business profiles.
4. Institutionalization
Performance measurement systems provide an opportunity to achieve sustainable success through institutionalization, the stage at which employees at all levels of the organization understand how their actions
affect the company’s results and, by extension, their own pay. With clear, consistent and frequent communication and training, the right behaviors and performance measures will be institutionalized.
Additional considerations for firms with complex operations
Firms operating across geographic boundaries or within a diverse set of markets often seek centralized or uniform approaches to manage their operations efficiently and effectively, but a single and consistent performance
measurement system is not necessarily the best approach. To determine whether a group-wide, regional or local approach is better suited to your company, management must understand the unique business model(s) and path(s) to
creating shareholder value. If an organization creates value for shareholders by excelling in only one business model throughout its entire network of operations, then its performance measurement system should be largely
consistent. For example, online marketplaces and networking sites rely on large streams of customers and users to achieve critical mass. As seamless and consistent applications around the world are required to deliver shareholder
value, common performance measures and similar goals are needed to support the group business strategy.
Alternatively, if an organization has different business models and creates value differently through a range of disparate business units, then a variable system that responds to these inconsistencies is likely to be
required to provide shareholder value. Below are two primary variations when developing a performance measurement system for such an organization:
1. Consistent performance measures and different goals
For example, a professional services firm with operations throughout Asia has been organized primarily around geographic units. While revenue growth may be a common performance measure across all units, the
opportunity to grow revenue may vary widely by location.
2. Inconsistent performance measures
For example, a Hong Kong-based multi-store retailer expanding into China may discover it needs different store models in China to be profitable. Market-specific performance measures designed to support the
geographically based business models are more effective than a uniform organization performance measurement system.

Performance measurement that creates shareholder value – case in point

There are many benefits to getting the performance measurement system right, as one international transportation company found out. By identifying and prioritizing the measures of success, and embedding them into variable pay
programs, the company gave itself a better opportunity to create long-term shareholder value.

Management was struggling to compete in a low-growth market with narrow margins and excess capacity. As an asset-intensive business, it experienced significant gaps between shareholder expectations and actual business plans.
To survive, the company needed to undergo rapid changes. However, information and management “silos” coupled with a topdown management style limited the company’s pace of change.

HR and Finance collaboratively redefined success using a different performance measure: They moved from return on invested capital (ROIC) to economic profit. It still measured returns on the invested capital but it would also
include a link to profits, which encouraged growth. Given the opportunity for improvement, leadership established a goal of doubling economic profit in just one year, and HR designed rewards programs to support this goal.
Management also began using a common process for decision making designed to create economic profit. This new process led to significant tactical and operational changes across the company and a substantial increase in the
pace of change.

FTSW1 – TIT and Capital Goods

Problem 1
Tisay Lakwatsera, a VAT registered taxpayer, had the following data on importation in 2019:
For sale Own use
Invoice cost (Exchange rate: $1=PHP46) $ 5,650 $ 850
Customs duties 12% 10%
Freight 20,000 4,000
Insurance 28,000 4,250
Other charges before release from customs house 7,000 2,500
Facilitation fee 10,000 5,000
Freight from customs house to warehouse(net of VAT) 12,000 1,200
Required:
a. Assuming the customs duties are determined on the basis of the quantity or volume of the goods, compute for the VAT on the importation.
b. How much is the VAT Payable if the imported goods for sale were sold for P665,000 (inclusive of tax) 10 days after its delivery to the warehouse?

Problem 2
Issa Company, a newly VAT registered business, has the following data in January (all amounts are inclusive of tax):
Merchandise Inventory 204,000
Actual VAT paid on the inventory 16,000
Sales, total invoice amount 469,000
Purchases 57,400
Fifty percent of the merchandise inventory on January 1 were purchased from non-VAT registered sellers.a
The VAT payable by Issa Company is?
Problem 3

Ms. Emma Thompson, a real estate dealer has the following data with regards to sale transactions for the month of May, 2020.

Sale 1
Consideration in the Deed of sale 6,000,000
Fair market value as assessed 5,100,000
Zonal value 4,900,000
Date of sale May 2, 2020
Cost to the seller 1,000,000
Mortgage assumed 2,000,000
Payments received:
May 2, 2020 500,000
May 2, 2021 700,000
December, 2021 2,800,000

Sale 2
Date of sale May 12, 2020
Consideration in Deed of Sale 4,000,000
FMV appearing in the Tax Declaration 3,900,000
Zonal Value 4,200,000
Cost to the seller 500,000
Mortgage to be assumed by the buyer 700,000
Payments received:
May 12, 2020 2,000,000
 May 12, 2021 1,300,000
Required:

1. Compute for the Total VAT for sale 1 and sale 2

2. Compute for the VAT for the month of May, 2020; May, 2021 and December, 2021

Problem 4
Tony Banderas, a VAT registered taxpayer engaged in merchandising business, has the following data for the month of January:

Cash Sales 770,000

Sales returns on cash sales 55,000
Account sales 495,000
Goods consigned:
January 10 at the current year 265,000
November 10 of the preceding year 16,500
Goods taken for personal use 18,150
Goods taken as payment to creditors 25,850
Purchases of merchandise 1,008,000
Purchase of supplies 89,600
Telephone bills on domestic calls 3,360

Required: Output tax

Problem 5
A taxpayer provided the following data for the month of November and December:
November December
Sales, net of vat 3,000,000 4,000,000
Purchases of goods for sale, vat exclusive 1,100,000 1,250,000
Purchases of machines, net of vat 1,800,000 900,000
Machine life 6 years 3 years
Required:
1. vat payable for November
2. vat payable for December

UTILIZATION OF CONSTRAINED RESOURCES Learning Objective 5: Prepare an analysis on which product to prioritize given limited resources.

• Anything that prevents an organization from getting more of what it wants (e.g., profits) is a constraint.
• A particular machine may not have enough capacity to satisfy current demand.
• Supplies of a critical part may not be sufficient to satisfy current demand.
• When the constraint is a machine or a work center, it is called a bottleneck.
• When capacity is not sufficient to satisfy demand, something must be cut back. Which products should be cut back and by how much?
• Fixed costs are not usually affected by the decision of which products should be emphasized in the short run. All of the machines and other fixed assets are in place—it is just a question of how they should be used.
• When fixed costs are unaffected by the choice of which product to emphasize, maximizing the total contribution margin will also maximize total profits.
• The total contribution margin is maximized by emphasizing the products with the greatest contribution margin per unit of the constrained resource.

SAMPLE PROBLEM: UTILIZATION OF SCARCE RESOURCE

Ensign Company makes two products, X and Y. The current constraint is Machine N34. Selected data on the products follow:
X Y
Selling price per unit ........................................ P60 P50
Less variable expenses per unit ........................ 36 35
Contribution margin ......................................... P24 P15
Contribution margin ratio ................................. 40% 30%
Current demand per week (units) ................... 2,000 2,200
Processing time required on Machine N34 per unit 1.0 minutes 0.5 minutes

Machine N34 is available for 2,400 minutes per week, which is not enough capacity to satisfy demand for both product X and product Y. Should the company focus its efforts on making product X or product Y?

CM PER UNIT OF THE CONSTRAINED RESOURCE

X Y
Contribution margin per unit (a) .................... P24 P15
Constrained resource required to produce

one unit (b) .................................................. 1.0 minute 0.5 minute

Contribution margin per unit of the

constrained resource (a)÷ (b) ...................... P24 per minute P30 per minute
• Product Y should be emphasized because it has the larger contribution margin per unit of the constrained resource. A minute of processing time on Machine N34 can be used to make 1 unit of Product X, with a
contribution margin of P24, or 2 units of Product Y, with a combined contribution margin of P30.

• In the absence of other considerations (such as satisfying an important customer), the best plan would be to produce to meet current demand for Product Y and then use any remaining capacity to make Product X.