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Assessment of Management Performance: Opportunities and Limits

Limendo- assessment-of-management-performance

Basics and definitions of terms

Before the assessment of management performance can be discussed, the first step is to clarify the term.

Management Performance

In order to measure the composite term “management performance”, it must be clear what is meant by the individual terms “management” and “performance”:

The management of a company represents the persons in the company who may give instructions to other persons. By management we mean “the control, design and development of the company, whereby this task includes the management of the entire company or individual subdivisions as well as the management of employees. Based on the current discussion, the focus of the work is placed on managers who are active at a high hierarchical level and have multifunctional or multi-departmental responsibilities.

The concept of “performance” is very broad and encompasses multiple meanings: fulfillment (of a duty), (output) performance (of a worker, an athlete, a machine, an engine, etc.), and finally performance or performance. In existing work, the term “performance” also shows this diversity of the definition of “performance” resulting from the translation of the term. For example, Robertson et al. define the term management performance as current performance (proficiency) and transportability. Students of the University of St.Gallen defined the term “student”.

Characteristics of Management Performance, including the following descriptions:

  • Quality of decisions
  • Increase in enterprise value
  • Achievement of set goals and evaluation of the achieved results
  • Customer and shareholder satisfaction
  • Positioning in the market – benchmarking with other companies
  • Business development last year, acquisition of orders

In this paper, the term “management performance” is understood as follows: The performance of the management (higher hierarchical level) is expressed in the fulfilment of the management tasks (control, design, development of the company as well as personnel management) and in the output of the company. In terms of output, the focus is on increasing corporate value, customer, employee and shareholder satisfaction, and business development.

Performance metrics

In order to assess or measure management performance, it is necessary to find variables on the basis of which an assessment can be made. Such performance metrics fulfill various purposes. They are important to ensure planning and coordination in the company, to communicate the strategy, to motivate and to recognize early warning signals.

Objective means that the quantity to be measured can be independently evaluated and verified. These include, for example, Costs of Good Sold (COGS) or sales. Objective sizes leave no doubt as to the result to be achieved. A clear advantage of objective sizes results in motivation through fairness as interpretations are left out.

Completeness is reflected in the ability of a measurand to measure the totality of the relevant behavior. Relevant behaviour results from the objective pursued. For example, customer visits per month would not be a complete measure of sales growth, as customer visits alone cannot increase sales. Economic Value Added (EVA®), for example, represents a complete figure, since it is able to represent the entirety of the relevant behavior in a company.

However, the greatest disadvantage of this measurand is its completeness: As described, a measurand can be influenced by those persons whose behaviour is measured by the measurand. However, this influence can no longer be given with very highly aggregated measured variables such as EVA®.

On the basis of these criteria, the decision tree shown in the figure is created, which is useful for the selection of suitable measured variables.

If objective measured variables are used, it must be ensured that the measured variable is as comprehensive and complete as possible, otherwise the management could act dysfunctionally or elude control by influencing the measured variable, as shown in the figure.

The following behaviors can occur:

  • The system is outwitted by directing energy to optimizing the metric without improving the underlying goals or strategies (gaming).
  • The time of reporting is changed to show better performance (smoothing).
  • Only good news is communicated, bad news left out (biasing)

If, on the other hand, subjective measures are used, as in most HR approaches, the evaluator must be carefully selected. At top management level, the problem of evaluation arises from the fact that top managers are judged by their peers, as is exemplified by UBS’s performance evaluation approach. Conflicts of interest cannot be ruled out in this approach. It is therefore questionable to what extent such an assessment can be satisfactory.

Management Performance: Towards whom?

Modern management theory considers the company in its socio-economic context. The claim of the investors is recognised, but the company also recognises that the shareholders are not the sole authority for decisions relevant to the company and that its actions are geared accordingly to the demands of the various groups.

Management performance should therefore be viewed from different angles.

The following entrepreneurial stakeholders must be integrated into an analysis of management performance:

  • The demands of capital owners: above all, return on capital, preservation of substance and safeguarding influence are the main priorities for this group.
  • The demands of the employees: For the employees, job security, safeguarding of wages and salaries and success shares are the main priorities.
  • The demands of the environment should draw attention to the demands of society on companies. This perspective is taken into account by considering management performance from a corporate governance perspective.

The demands of capital owners

Above all, return on capital, preservation of substance and safeguarding influence are in the foreground for this group.

The demands of the employees

Above all, return on capital, preservation of substance and safeguarding influence are in the foreground for this group.

The demands of the employees

They are intended to draw attention to society’s expectations of companies. This perspective is taken into account by considering management performance from a corporate governance perspective.

Employee perspective

The employee’s perspective is special in that the relationship between manager and employee is based on an unequal distribution of power. Managers have official authority as well as (official) reward and punishment power.

Every employee pursues a number of interests. These can be divided into tasks, careers and extramural interests. The goals that an employee pursues in an employment relationship can be very different. Depending on which interests are in the foreground, the demands on the manager will also vary. The manager has created benefits from the employee’s point of view if the employee satisfaction is high, i.e. if there is a large “agreement between the expectations, demands or values of the employees and characteristics of their work situation. In accordance with this statement, Wunderer and Dick found out in an investigation among Swiss personnel experts between 1998 and 2000,
that special importance is attached to the following management tasks:
creating trust, recognising and promoting employee potential and communicating visions.

Accordingly, the assessment of management performance from an employee’s point of view will also be measured on the basis of employee satisfaction, which, as shown, depends on the extent to which a manager has fulfilled the employee’s expectations through his or her conduct.

Company owner view

Unprofitable economies and numerous company closures in both the USA and Europe have led to a renewed focus on increasing the capital value. The owners of the company are primarily concerned with sufficiently high compensation for their high-risk investments. In their eyes, the generation of shareholder value comes first. The shareholder value approach is based on the assumption that all further claims can be satisfied by meeting the financial claims.

Since ownership relates to the entire company, it is reasonable to assume that the owners assess management performance on the basis of company performance. In a survey of 319 directors from 14 European countries – the owners’ representatives – 62% said that the performance of a CEO is best reflected in the profitability of the company. From the owner’s point of view, management creates benefits when certain financial indicators are achieved by the company. It is important for the owners to be able to judge whether the person will also be able to develop the company in a positive direction in the future.

Co-/environmental perspective

Companies have become the focus of public interest today, especially since society became aware that companies not only produce goods, but also risks. Increased risk awareness on the part of the population and increasing risks (partly caused by companies) lead to a certain resistance from the public. This makes the reputation of a company a decisive factor. In addition, public pressure on corporate monitoring has also increased. We take this into account by taking a brief look at a corporate governance perspective.

Social reputation:
In the foreground of a public perspective is sustainable management, measures which are only promising in the short term lead to deep management performance from the point of view of society. The success of a manager is assessed not only on the basis of his financial results, but also in his dealings with the systems of politics, science and business.

Corporate Governance Perspective:
The Board of Directors, as the supreme lobbying body of the joint-stock company in Switzerland, has a great interest in the performance of the management, as its own reputation ultimately also depends on the extent to which it succeeds in sustainably increasing the value of the company with the help of the management.

Due to its deeper insight into the business, the Board of Directors should be able to analyse the performance of management more thoroughly than is possible from external sources. This means that, for example, measurement variables such as the quality of decisions could be used for evaluation if there is a possibility of measurement. Nevertheless, financial indicators will provide the basic framework for evaluation. However, a recent study gives cause for concern as to the extent to which boards of directors are able to carry out the tasks entrusted to them. While 68% of respondents were very satisfied with the supervision of the Chief Executive Officer (CEO) and 55% with the Chief Financial Officer (CFO), only 49% said they had a very good understanding of how the compensation policy matched the strategy and risk profile chosen.

Human Resources – Perspective

In contrast to the groups explained above, Human Resources, as a function within the company, does not represent a separate stakeholder group. However, their significance derives from their role in the company. The Human Resource department develops the personnel assessment procedures for the company and plays a central role in recruitment, promotion and potential development. From a human resource perspective, the assessment of management performance is a central, regularly carried out component of human resources management with two main objectives. This is on the one hand the motivation of the person – often the variable part of the remuneration is linked to the assessment – and on the other hand ensuring the development of the person.

The human resource departments regularly evaluate the performance of the employees in the company. Thus, the evaluation of management performance is also part of the established field of activity. In the foreground is the evaluation of abilities in connection with behaviour patterns shown.

Factors Influencing Management Performance

In the previous sections it was explained that the performance of management can be viewed and assessed from different angles. In the following, factors influencing management performance are shown using a model. For this reason, it is important to consider which influencing factors ultimately lead to a good or less good performance. The manager’s actions cannot be viewed in isolation: How his performance is assessed depends not only on the evaluators, but also on environmental factors. The following figure provides an overview of the various factors that influence management performance.

Factors Influencing Management Performance

Personal, interpersonal and directive skills

Since the beginning of the 20th century, publications on leadership qualities and competencies have been published time and again. The stock of books and articles on the subject is now almost unmanageable.

So far, however, it has not been possible to find any generalizable connections between personality traits and management performance. For about thirty years, attempts have therefore been made to see the success of leadership behaviour as a function of the respective situations. These approaches are known as situational leadership: Investigations with executives have shown that the effect of any leadership behavior is limited by internal and external factors. Which personality traits and which competencies are particularly important depends on these environmental factors. Some are considered below.

Internal factors

Internal company factors are used to characterize the company situations (growth, change, crisis, etc.), the inherent values and cultures as well as interpersonal relationships within the company. The freedom of action of managers depends on or is restricted by the following internal factors:

  • corporate culture
  • Power that the Chief Executive Officer [CEO] has compared to other key stakeholders, including the board of directors, coalitions of managers or unions.
  • Financial situation of the company

 

External framework

The company in which a manager works is embedded in an environment. A useful model to illustrate this is Porter’s 5 Force Model. It characterizes industries as the interaction between suppliers, competitors, buyers and potential entrants and substitutes. Macroeconomic changes such as the economic situation should also not be forgotten. The directional abilities of a leader mentioned refer to the understanding of this context. Context factors can restrict the freedom of action of the leader in the following directions:

  • Type of market in which the company is located. Freedom of action is greater in growth markets with few competitors.
  • Degree of power exercised by stakeholders. Thus, a few customers on whom the company depends restrict its freedom of action.
  • The more political / legal restrictions are imposed, the less room for manoeuvre the leader has.

Behaviour and action options of the manager

Various scientific papers have dealt with what a manager has to do, which tasks he has to fulfil and how he has to behave in order to be successful. A survey of personnel managers showed that
that the following tasks will gain special importance in the future:

  • build trust
  • Recognizing and promoting employee potential
  • Communicating visions and
  • Develop networked thinking

While this study, which originates from personnel management, focuses primarily on employee-oriented tasks, other authors focus on other areas. Thus Müller-Stewens and Lechner place the conception and implementation of strategic initiatives, respectively the creation of a supportive context, which favours emergent strategy formation in the company, in the centre of the management tasks.

Effective, good management uses various methods to maintain and implement control in the company: Simons classifies the various possible actions of a manager into the model of “levers of control” and thus shows generic levers for corporate management:

  • belief systems
  • boundary systems
  • Interactive control systems (interactive control systems)
  • Diagnostic control systems (diagnostic control systems)

The management tasks or options for action of the management consist of establishing a value system in the company, showing the employees limits, making the company more controllable through interaction with the employees and implementing an evaluation of what has been achieved through diagnostic control systems.

Approaches to Management Performance Assessment

In summary, it can be said that management performance depends on various factors: The personal and professional requirements of a manager vary due to different internal and external circumstances.
A manager has four generic design options with which he can control the company. Depending on how efficient a manager is in dealing with these alternatives and how accommodating the internal and external environment is to him, he will work differently well. The resulting performance must then be assessed from different perspectives: Good performance towards whom?

In the following, some approaches from literature and practice are presented which deal with the question of measuring management performance. They are evaluated according to the criteria of objectivity, completeness and influenceability.

Return on Management

The Return on Management (ROM) approach measures the relationship between “realised, organisational energy” and “invested management attention”. The same relationship applies as for other profitability measures such as return on investment: The relationship between input and output should be as large as possible. The core question of the approach is: Does the management get the maximum return from every invested hour of time? The big difference to other profitability measures lies in the qualitative instead of quantitative measure, whereby no key figure can be calculated. However, this is not the goal of Simons either. Rather, he strives to draw attention to, as he writes, a company’s most valuable resource, management. He identifies “friends” and “enemies” of a high ROM, i.e. well invested management time.
The management increases its return by observing the following rules:

  • There is clarity as to which customer groups, projects or activities lie outside the entrepreneurial border system.
  • Critical performance variables were chosen in such a way that all employees in the company stand behind the key figures.
  • Managers know their diagnostic control system, which is designed in such a way that there are never more than seven parameters.
  • All management processes are geared to value creation.
  • The employees know what the management’s priorities are and align their behaviour and working methods accordingly.
  • Deviations from the previously mentioned optimal design of management work lead to a deep ROM and thus to poor management performance.

The ROM is a good approach to measure management performance as it recognises the difficulties associated with the complexity of management tasks and does not attempt to reduce them to financial metrics.

Management Control Audit

The Management Control Audit (MCA) evaluates the performance of managers directly on the quality of the work they do. The evaluation of the conceptual orientation of the management’s work is in the foreground. It assesses the extent to which managers succeed in leading strategic initiatives that could develop a negative momentum of their own in the right direction.
Such an MCA consists of three components:

  • Evaluation of “concepts” of important strategic initiatives. Here, the extent to which management was able to launch important strategic initiatives is assessed (concept audit).
  • Evaluation of the implementation of “concepts” of strategic initiatives. The focus is on those points in the process where the actual implementation can be checked or measured (implementation corecard).
  • Finally, an assessment is made of the extent to which the financial results achieved are a result of the strategic initiatives launched. The issue is whether the “concepts” of strategic initiatives have actually resulted in an increase in value (financial controlling).

The concept of MCA basically offers a good idea for management evaluation:
Strategic initiatives are, among other things, a result of the management’s work and, if evaluated, can represent an approximation of the performance achieved by the managers.
However, we see very serious evaluation problems in connection with strategic initiatives: It can only be measured to what extent the company delivers better financial results before and after implementing the strategy.

Human Resource – Assessment

In the following, different human resource approaches from literature and practice will be presented, whose concern is to measure the performance of the employees.

According to Hilb, a holistic personnel assessment comprises the following dimensions:

  • qualitative dimension (target and path assessment)
  • Quantitative dimension comprising both a periodic (e.g. annual) overall assessment and a daily assessment.
  • Time dimension (past and future related)
  • Reference group-oriented dimension (self-assessment and external assessment)

For example, the 360○ degree approach can be called a human resource approach. The work performance is judged according to whether ?the judged owner, coworker, mitwelt and customer-oriented use donated and behaved accordingly. The employee is assessed by the superior, the employee and internal as well as external customers. This provides a comprehensive picture of employee performance.

With regard to executives, i.e. management, the 360○ degree approach is also used: the
manager is assessed by his colleagues, his managers, internal and external customers. In addition, a self-evaluation is carried out. In addition to measuring the achievement of objectives, the focus in HR approaches is mainly on path assessment. This is to prevent a person from reaching the goals 100% but frustrating many other employees on the way through their behaviour.

Possibilities and limits of management performance assessment

After stakeholders, influencing factors and evaluation systems have been discussed, the possibilities and limits of management performance assessment can be summarized here. For this purpose, the criteria of objectivity, influenceability and completeness of the ideal measured variables according to Simons are to be recalled once again, which are used for the assessment.

The limits and possibilities are discussed in each case:

Factors Influencing Management Performance

While an objective assessment of professional competence is possible, this is certainly not the case for personal qualities. Since these personal factors are always related to external and internal factors, it is not possible to determine the “right” or “most important” personal factors. In addition, management performance cannot be determined by the performance of certain actions or behaviors, since here too situational dependency must be taken into account and therefore no uniform set of possible actions can be determined.

Management performance from a stakeholder perspective

Due to an abundance of different stakeholders of the management performance assessment (company owners, employees, co-/environment) it is not possible to evaluate the management in a generalizable way. As shown, each stakeholder group pursues different objectives and thus places different demands on management, which leads to a different assessment of management performance.

The following figure shows the management performance evaluation from the perspective of the equity providers.

Approximation of management performance through financial ratios

The financial figures alone do not show how much the management itself contributed to the result and how much was caused by external developments such as the economic situation. In addition, developments are often only reflected later in the financial indicators, so that it cannot be ruled out that the current results reflect the actions of predecessors. At the same time, the manager’s orientation is too much focused on the short-term future instead of the long-term future of the company.

In conclusion, it must be said that it is not possible to measure management performance in terms of objective, complete, influenceable target figures. If these criteria are relaxed, however, an assessment is quite possible with the restriction that the respective situation is included and the stakeholder group is named.

Limendo business consulting is happy to support you in assessing your management performance.