Introduction to Performance Management: formula sheet

Key formulas

Performance management as a loop

Strategy → Plans and targets → Measurement → Feedback and review → Action → Revised strategy and targets

Use this chain to link strategy, planning, measurement and control in any answer.

Measurement vs management

Performance management = Objective setting + Measurement + Review + Reward + Corrective action

Performance measurement is only one component, so the two terms are not interchangeable.

Control comparison

Variance = Actual result − Target (or Target − Actual, stating which is favourable)

Control means comparing actual with target and acting on significant variances.

Variance (basic comparison)

Variance = Actual result − Target (or Budget)

State whether it is favourable or adverse. For costs, actual below target is favourable; for revenue or profit, actual above target is favourable.

Achievement percentage

Achievement % = (Actual ÷ Target) × 100

Use it for a KPI where higher is better. For a cost or time KPI where lower is better, read the result in the opposite direction.

Order of the cycle

Objectives → Planning/targets → Monitoring/measurement → Review → Feedback → Corrective action → Revised objectives

This is a framework, not a numerical formula. Keep the sequence and link each stage to the case facts.

Strategy-to-measure chain

Mission → Vision → Goals/Objectives → Strategy → CSFs → KPIs → Targets

Use this as the answer skeleton. Each item must be derived from the one before it.

CSF versus KPI

CSF = what must be achieved well; KPI = measure of how well it is achieved

A CSF is stated in words. A KPI carries a unit, a formula and a target.

SMART objective test

Specific, Measurable, Achievable, Relevant, Time-bound

Use it to judge whether a stated objective is usable for performance measurement.

KPI percentage example

On-time delivery % = Orders delivered on time ÷ Total orders delivered × 100

Always state the formula, unit and period when you define a KPI.

Characteristics of a good measurement system

Strategy-linked + Balanced + Controllable + Timely + Clear + Reliable + Comparable + Cost-effective

Use as a checklist to evaluate any system or measure in a case. Not every textbook lists the same words, so explain each trait you name.

Financial vs non-financial

Financial = lagging, money terms; Non-financial = often leading, physical or qualitative terms

Say 'often leading', not 'always'. Some non-financial measures, like past complaints, also describe history.

Limitations of traditional (financial-only) measures

Short-term focus + Backward-looking + Weak strategy link + Ignores intangibles + Distortion by accounting + Dysfunctional behaviour

Standard answer structure for 'criticise traditional measures'.

Controllability principle

Judge a manager only on items the manager can influence

Separate controllable and non-controllable results when assessing managers, as against assessing the unit.

Controllable profit (divisional)

Controllable profit = Revenue − Variable costs − Controllable fixed costs

Used to judge the divisional manager. Excludes fixed costs the manager cannot influence.

Segment (divisional) profit

Segment profit = Controllable profit − Traceable but uncontrollable fixed costs

Used to judge the division as an economic unit, not the manager.

Return on investment

ROI = Divisional profit ÷ Capital employed × 100

Used for investment centres. Define profit and capital employed consistently.

Residual income

RI = Divisional profit − (Capital employed × Required rate of return)

Positive RI means the division earns more than the required return.

Cost variance rule

Variance = Actual cost − Standard cost for actual output (adverse if positive)

Compare with a flexed budget, not the original budget, when judging a cost centre.

Controllability rule

Evaluate a manager only on items they can influence in the period

Report uncontrollable items separately, not inside the manager's result.

Quick revision

• Performance management links strategy to measurement, review and action; it is not just an annual appraisal.
• The cycle runs through planning, measuring, reviewing and acting, then feeds back into planning.
• Mission states why the organisation exists; goals and objectives turn it into targets.
• Critical success factors are the few areas where results must be good for the strategy to work.
• Each measure should connect to a goal or critical success factor.
• Use both financial and non-financial measures for a balanced view.
• A good measure is relevant, understandable, timely and within the manager's influence.
• A cost centre is judged on cost control; a revenue centre on revenue.
• A profit centre is judged on profit; an investment centre on profit relative to capital employed.
• Judge managers on what they can control; separate manager performance from unit performance.
• In case answers, name the centre or framework, apply it to facts, and recommend.

Common mistakes

• Treating performance management and performance measurement as the same thing. Fix: Say measurement quantifies results; management covers objectives, measurement, review, reward and action.
• Describing it as an annual employee appraisal only. Fix: State it applies at organisation, unit and individual levels and is continuous, not once a year.
• Treating performance management as an annual appraisal of employees only. Fix: Describe it as an organisation-wide process covering strategy, units, processes and individuals.
• Listing stages without applying them to the case. Fix: Attach each stage to a fact from the scenario and say what is working or missing.
• Treating CSF and KPI as the same thing Fix: Write the CSF as an area of performance and the KPI as a number with a unit. 'Customer retention' is a CSF; 'repeat customers ÷ total customers × 100' is a KPI.
• Listing too many CSFs Fix: Limit to three to five CSFs that are directly tied to the strategy in the case.
• Saying non-financial measures are better than financial ones. Fix: Say the two are complementary. Financial measures show results; non-financial ones help explain and predict them.
• Writing a generic list of characteristics without applying them to the case. Fix: Tie each trait to a fact in the case, for example 'the plant manager cannot control raw material price, so the measure fails controllability'.
• Calling a department a profit centre because it generates revenue, though the manager cannot set prices or control costs. Fix: Test authority. A profit centre needs control over both revenue and costs.
• Including allocated head-office costs in the manager's performance. Fix: Judge the manager on controllable profit. Show allocated costs only below that line to assess the division.

Exam tips

• Always define first, then show the loop of strategy, plan, measure, review and action.
• In distinction questions, give at least three points of difference and one example.
• In case questions, name the company and its strategy in every paragraph.
• Remember Section A has 15 MCQs of 2 marks each with no negative marking in the papers, so attempt every one.
• Mention both financial and non-financial aspects when asked about scope.
• Write the stages in order and tie each to a case fact. A bare list earns few marks.
• For MCQs, identify the stage first, then eliminate options that break the sequence.
• In numerical parts, label every variance favourable or adverse and always add a recommendation.