Monday, 9 November 2015

How to Define the Right Metrics Using Three Steps? Part 3

Step Two – Isolate the Underlying Causes

Tying Plan Achievement to Compensation
The behaviour of people often depends on how people are rewarded and the way they are rewarded is a vital part of the effective management process. Many business plans are extremely focused on the finances, so it’s not surprising to learn that a third of businesses tie in incentives to the performance in relation to the annual financial plan.

Another common practice is for organisations to determine bonuses based on the achievement of business plans. Plans are developed to decide the tactics that are to be used and to allocate the resources to achieve the objectives that have been agreed upon in advance. If compensation is tied to hitting targets of the financial plan, there is often a tendency to be conservative in order to increase the chances of fulfilling the plan.  It is often a risky way to run things this way and there is a need to have a clear understanding of the cause and effect relationships that are found between tactics and objectives. It’s also important to be able to identify problems and any changes in order to rectify any issues.

Incomplete Strategy Definition
Strategies will describe what the organisation intends on doing but not many strategic plans include the things that the company isn’t going to do. In many cases, defining what the company isn’t going to do is just as, or more, important that stating what they’re going to do. By stating what’s not part of the strategy helps to simplify the choices that need to be made.

Inadequate Risk Recognition

The economic slowdown in 2008 raised awareness of how many industries had failed to appreciate the risks and the impact the economic crisis would have on the business. For performance management to work, it’s necessary to address the risks and uncertainties so that rational decisions can be made. A formal scenario plan along with the internal and external risks should be considered when developing the business plan, followed by a risk assessment process but many businesses still fail to do so.

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