Advanced Performance Management · Non-financial performance measurement

Designing and Implementing Non-Financial Performance Measures

Updated 11 October 2026 · Fact-checked

Non-financial measures track drivers of success that profit figures miss, such as quality, customers, innovation, people and social impact. To answer APM questions, link each KPI to a strategic objective, check it is measurable and controllable, then discuss data quality, behavioural effects and target setting.

Understand Designing and Implementing Non-Financial Measures

Financial results show what has already happened. Non-financial measures show why it happened and what is likely to happen next. Customer complaints rise before sales fall. Staff turnover rises before service quality drops. That is why they are often called leading indicators, while profit is a lagging indicator.

A good KPI starts with strategy, not with data that happens to be available. First ask what the organisation is trying to achieve. Then ask which critical success factors must go right. Only then choose measures that show whether they are going right. A measure with no link to strategy wastes effort and misleads managers.

Typical areas and examples:

Quality: defect rate, rework percentage, returns, cost of quality, on-time delivery.
Customer: satisfaction score, Net Promoter Score, complaints, repeat purchase rate, customer retention, market share.
Innovation: percentage of revenue from new products, time to market, number of patents, R&D pipeline success rate.
Employee: staff turnover, absenteeism, training hours, engagement scores, internal promotion rate.
Social and environmental: carbon emissions, waste recycled, community investment, safety incidents.

Design is only half the job. Implementation brings problems. Data may be unreliable or costly to collect. Managers may change behaviour to hit the number rather than the goal. Targets may be too easy, too hard or set without staff input. Non-financial measures also have no common unit, so they are hard to add up or compare, and they do not always link clearly to profit.

In the exam, you are rarely asked to list KPIs. You are asked to choose them for the scenario and to evaluate them. Marks come from application and judgement.

Key rules to remember

SMART test for a KPI: Specific, Measurable, Achievable, Relevant, Time-bound; Use it to judge whether a proposed measure and its target are well designed. Apply each letter to the scenario rather than just naming it.
Leading versus lagging: Leading indicator = predicts future results; Lagging indicator = reports past results; Most non-financial measures are leading. Say which type each KPI is and why it matters to managers.
Customer retention rate: Retention rate = (Customers at end − New customers gained) ÷ Customers at start × 100; Use customers from the same period. New customers must be removed or the rate is overstated.
Staff turnover rate: Turnover % = Leavers in period ÷ Average number of employees × 100; Average headcount is usually (opening + closing) ÷ 2.
Defect rate: Defect rate % = Defective units ÷ Total units produced × 100; Make clear whether the base is units produced or units inspected.
Controllability principle: A manager should be judged only on factors they can influence; A key design rule. Uncontrollable measures demotivate and distort behaviour.

How to solve Designing and Implementing Non-Financial Measures questions

Use this method for any question asking you to select, design or critique non-financial measures.

1Identify the organisation's strategy and objectives from the scenario. Note the stakeholders whose needs matter.
2Pick the critical success factors that follow from those objectives. Do not choose KPIs before this step.
3Choose a small number of KPIs for each factor, covering the relevant areas: quality, customer, innovation, employee, social. Tie each one to a specific fact in the scenario.
4Define each measure clearly: how it is calculated, data source, frequency, who owns it, and a target.
5Test the measures against criteria such as SMART, controllability and cost of collection. Say which are leading indicators.
6Discuss implementation problems: data quality, behavioural effects, target setting, information overload, and difficulty linking to financial results.
7Give practical recommendations: involve staff, balance the set, audit data, review measures regularly.
8Answer the exact requirement and finish with a short conclusion. Show professional skills by weighing pros and cons commercially.

Quickest way: Objective, KPI, risk in three lines

When to use it: Use when time is short, or for a 10 to 12 mark part of a Section B question.

Write the objective from the scenario, for example 'improve service reliability'.
For each objective, write one KPI, how it is measured, and one scenario fact that justifies it.
For each KPI, add one implementation risk and one fix, such as 'staff may rush calls to cut call time; add a customer satisfaction measure'.
Check the marks. Aim for about one point per mark and make each point scenario-specific.

Common mistakes in Designing and Implementing Non-Financial Measures

Listing generic KPIs that do not fit the scenario.
Students memorise lists of customer, quality and staff measures and reproduce them.
Fix: Open the scenario, find the strategy and a specific problem, then choose KPIs that address it. Refer to the business by name.
Choosing KPIs with no link to strategy.
Students start from what is easy to measure.
Fix: State the objective and critical success factor first. Then say how the KPI shows progress.
Discussing only the benefits of non-financial measures.
Students forget that evaluation needs both sides.
Fix: Include limitations: subjectivity, no common unit, cost of data, weak link to profit, and possible information overload.
Ignoring behavioural effects.
Students treat KPIs as neutral reporting tools.
Fix: Ask what a manager would do to hit the target. Give examples like cutting call time at the cost of service quality, and propose a balancing measure.
Setting targets without explaining how they are set or justified.
Students stop at naming the KPI.
Fix: Discuss benchmarks, past performance and staff participation. Warn that targets that are too hard demotivate and too easy give no challenge.
Overlooking data quality.
Students assume the figures are accurate once defined.
Fix: Comment on source, bias in surveys, sample size, timing, manipulation and who verifies the data.

Worked examples

Example 1

A regional airline wants to improve its reputation for reliability and service. Its board currently reviews only profit and load factor. Recommend four non-financial KPIs and explain one implementation problem for each. (12 marks)

Show the solution

Objective: build a reputation for reliability and service so that customers return and pay fair fares.
KPI 1, on-time departure percentage = flights departing within 15 minutes of schedule ÷ total flights × 100. It is a leading indicator of customer satisfaction. Problem: crews may rush boarding or safety checks to hit the target. Fix: pair it with a safety compliance measure and audit it.
KPI 2, customer satisfaction or Net Promoter Score from post-flight surveys. It shows how passengers see service. Problem: low response rates and bias, because unhappy or very happy passengers respond most. Fix: use random sampling and track the response rate.
KPI 3, lost baggage incidents per 1,000 passengers. It is objective and ties to a common complaint. Problem: part of the process is run by airport handlers, so it is not fully controllable. Fix: agree service levels with handlers and report the trend.
KPI 4, cabin crew turnover and engagement score. Service quality depends on motivated staff, so this is a leading indicator. Problem: exit data may be incomplete and survey answers may be guarded if staff fear consequences. Fix: anonymous surveys and exit interviews.
Conclusion: the set covers operations, customer and people. It should be balanced against cost per seat so reliability is not bought at any price.

Answer: Recommend on-time departure percentage, customer satisfaction or NPS, lost baggage per 1,000 passengers, and crew turnover and engagement. Each is tied to reliability and service. Risks include gaming of the on-time target, survey bias, partial controllability of baggage handling, and unreliable people data. Balance the set with cost and safety measures.

Example 2

A company had 200 employees at the start of the year and 220 at the end. During the year 31 employees left. It also had 400 customers at the start, 460 at the end, and gained 120 new customers during the year. Calculate staff turnover and customer retention, and comment on one risk in using these figures. (6 marks)

Show the solution

Average employees = (200 + 220) ÷ 2 = 210.
Staff turnover = 31 ÷ 210 × 100 = 14.76%, about 14.8%.
Customers retained = 460 − 120 = 340.
Retention rate = 340 ÷ 400 × 100 = 85%.
Customers lost = 400 − 340 = 60, so churn is 15%.
Comment: a single turnover figure hides which staff left. Losing 31 low performers differs from losing 31 key engineers. Likewise, 85% retention may mask the loss of the most profitable customers. Split the data by segment and compare to industry benchmarks.

Answer: Staff turnover is about 14.8% and customer retention is 85%. Both should be analysed by segment and benchmarked, because averages can hide the loss of high-value staff or customers.

Exam tips

Always begin from the scenario's strategy. Examiners reward KPIs that clearly follow from the business's stated goals.
Name the type of measure (leading or lagging, input or output) when it helps your argument. It shows technical command quickly.
In any evaluation, cover data quality, behavioural effects and target setting. These three score repeatedly.
Use professional skills marks by recommending a balanced, practical set, not a long list. Show commercial judgement on cost versus benefit.
If asked to calculate, show the formula and working, then add a sentence of interpretation. A number alone earns few marks.

Practice questions from Non-financial performance measurement

Designing and Implementing Non-Financial Measures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CFA Level ITypes of Financial and Non-Financial Risks

Designing and Implementing Non-Financial Measures: frequently asked questions

How many KPIs should I recommend in the exam?

Match the marks and the requirement. Three to five well-justified KPIs usually score better than a long list. Each should tie to a specific objective in the scenario.

What is the difference between a KPI and a critical success factor?

A critical success factor is something the organisation must get right to achieve its strategy. A KPI is the measure that shows how well it is doing on that factor. Define the factor first, then the KPI.

How do I deal with behavioural problems from KPIs?

Ask what a manager might do to hit the number at the expense of the real goal. Then suggest fixes such as a balancing measure, a mix of leading and lagging indicators, staff involvement in target setting, and data audits.

Can non-financial measures replace financial measures?

No. They complement them. Financial measures show results and non-financial ones show drivers. A balanced set gives a fuller view, and frameworks such as the balanced scorecard are built for this.