Efficiency is the ability to do the most at the least cost and fastest time. Just to clarify, many people get confused by the difference between efficiency and effectiveness. You can be effective in doing something but not efficient but you can never be efficient in something if you are not effective. Simply put, the ability to do something very quickly and cheaply can only be considered efficient if the end goal or product is achieved to the desired specifications.
It is a given that to even measure efficiency, the output requirements must be met. Therefore, measuring management efficiency is only possible when the operation produces the right product or service. Once the output does not meet specifications, it is an automatic fail because cost is incurred without having any production! How then would you measure managements performance?
Typically the textbook measure would be by the maximization of shareholder wealth, which many people would equate to net income and some would use cash flow. Management performance is normally measured against certain benchmarks such as previous or historic data, budget, peer competition and various rates of return and turnover ratios.
Previous performance is a common standard tool. It would be good for the company to make more than what it did last year. However, that in itself does not mean the company is indeed doing well. Imagine if your company’s revenues and net income increased by 5%. Is this good? To come up with a proper answer you would also need to know what is the period inflation rate, how much did the industry grow and perhaps how did the industry leader do? Sometimes even a modest performance is not too bad when everyone else did so much worse!
Increasing market share is also a leading indicator of management performance. It shows that you have been able to compete against your competitors and gained some ground. Of course, this needs to be analyzed with other metrics such as Rate of Return on Equity (ROE ) or Return on Investment (ROI) which can also be compared against your cost of funds and against what your industry is doing.
Other non-quantifiable measures such as brand recognition, employee retention and satisfaction, awards, corporate social responsibility and customer reviews are also good indicators of management performance. Typically, these non-quantifiable items do translate in solid numbers for the company with more revenues, higher profitability and bigger market share.
The ability to properly measure management performance is important to be able to adequately evaluate and compensate management for their skill and effort. Do not fall into the trap of just focusing on one metric to determine management performance evaluation. Imagine increasing market share from 10% to 60%, but swinging the bottom line from profitability into negative territory at the same time. Similarly increasing revenues by 20% is horrible if the industry grew by 40%! Know how to measure management performance properly!
(The views and comments of the author are his own and not of the newspaper or FINEX. Dr. George S. Chua was 2016 FINEX President, 2010 to 2020 FPI President, an active entrepreneur, a regular member of the National Press Club, Chairman of Alabang Country Club, a Professorial Lecturer 2 at UP Diliman and BGC, and loves playing golf.
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