Effective performance management systems have characteristics that enable managers to continuously engage and encourage their workforce, minimize attrition, and improve corporate results. The modern organization is dynamic, complicated, and confronts new difficulties. Innovation, communication, and adaptation are crucial for corporate success, even though output and productivity are a crucial statistic. Performance management that is conducted on an annual, irregular basis is therefore no longer effective. To capture real-time data and progress, top businesses now require a continuous approach to performance management that prioritizes ongoing performance conversations. In fact, to make performance management more continuous, almost 75% of firms have reinvented it.
In an article by Ittner C and Larcker D (2000) they suggested both advantages and disadvantages of Non-financial measures. They offer four clear advantages over measurement systems based on financial data.
a. First of these is a closer link to long-term organisational strategies. For example, new product development or expanding organisational capabilities may be important strategic goals, but may hinder short-term accounting performance. By supplementing accounting measures with non-financial data about strategic performance and implementation of strategic plans, companies can communicate objectives and provide incentives for managers to address long-term strategy.
b. Second, critics of traditional measures argue that drivers of success in many industries are “intangible assets” such as intellectual capital and customer loyalty, rather than the “hard assets” allowed on to balance sheets. Although it is difficult to quantify intangible assets in financial terms, non-financial data can provide indirect, quantitative indicators of a firm’s intangible assets.
c. Third, non-financial measures can be better indicators of future financial performance. Even when the ultimate goal is maximising financial performance, current financial measures may not capture long-term benefits from decisions made now.
d. Finally, the choice of measures should be based on providing information about managerial actions and the level of “noise” in the measures. Noise refers to changes in the performance measure that are beyond the control of the manager or organization, ranging from changes in the economy to luck. Five primary limitations have been identified as disadvantages;
Firstly, Time and cost has been a problem for some companies. They have found the costs of a system that tracks a large number of financial and non-financial measures can be greater than its benefits. Secondly is that, unlike accounting measures, non-financial data are measured in many ways, there is no common denominator. Evaluating performance or making trade-offs between attributes is difficult when some are denominated in time, some in quantities or percentages and some in arbitrary ways. The third issue is a lack of causal links with the fourth being the lack of statistical reliability – whether a measure actually represents what it purports to represent, rather than random \”measurement error\”. And finally although financial measures are unlikely to capture fully the many dimensions of organizational performance, implementing an ev
