The overall value that a company creates is the sum of the outcomes of innumerable business decisions taken by its managers and staff at every level, from choosing when to open the door to customers to deciding whether to acquire a new business. A company needs systems to ensure that all decisions affecting value are consistent with its short- and long-term objectives. Such performance management systems enable management to see clearly the impact of those myriad decisions on value creation.
Performance management systems typically include long-term strategic plans, short-term budgets, capital budgeting systems, performance reporting and reviews, and compensation frameworks. Successful value creation requires that all components of the performance management system be aligned with the company’s strategy, so that they encourage decisions that maximize value. For example, if product development is important to the strategic plan, the short-term budget and capital budget must include enough spending in the current year to develop the new products, and performance reviews must evaluate progress on new products, not just short-term profits.
The success or failure of performance management depends not so much on the system—the metrics, corporate meeting calendars, scorecards, and so on—as on the rigor and honesty with which everyone engages in the process. Do the senior management team members really understand the economics of the business units they oversee? ...