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Types of Performance Metrics
Determining & focusing on the right performance metrics to suit the SME company’s unique business model & culture is a prerequisite for any company to succeed. There is no universal formula that calculates the most appropriate or most equitable compensation plan. The process of choosing performance metrics which are best for the organization must be based on reasoned judgement, factual research & extensive C&B experience.
Earnings per share (EPS)
EPS is the principal measure for business performance, & is easily understood by management, the board & shareholders.
The advantages of using EPS are numerous. It is a comprehensive measure of net income earned, it focuses on profitable growth by increasing sales & controlling expenses, resulting in it being easily understood by employees of all levels, creating clear line of sight between employee behavior & business success. Line of sight is defined as metrics that are understood & can be impacted by the behaviors & performance of employees.
However, EPS should not be the only metric used to measure performance. Over-reliance on EPS will result in management making decisions to maximize profits for the short term, often at the expense of long term shareholder value. EPS can also be positively influenced through share buy-backs, fluctuations in foreign exchange, or amendments made to accounting rules & regulations. EPS growth calculations can also be disproportionately large when the base figure is small or negative, making comparisons against peer groups difficult.
Revenue
Revenue is a key measure of growth, & it is a simple & effective metric to drive performance, resulting in it being easily understood by employees of all levels, creating clear line of sight between employee behavior & business success.
Cash flow
Cash flow prioritizes the generation of cash in the short term to bankroll daily operations, pay dividends to shareholders & underwrite share buy-backs. It focuses on profitable growth by controlling expenses, strongly linking it to long term shareholder value creation.
Earnings per share (EPS)
EPS is the principal measure for business performance, & is easily understood by management, the board & shareholders.
The advantages of using EPS are numerous. It is a comprehensive measure of net income earned, it focuses on profitable growth by increasing sales & controlling expenses, resulting in it being easily understood by employees of all levels, creating clear line of sight between employee behavior & business success. Line of sight is defined as metrics that are understood & can be impacted by the behaviors & performance of employees.
However, EPS should not be the only metric used to measure performance. Over-reliance on EPS will result in management making decisions to maximize profits for the short term, often at the expense of long term shareholder value. EPS can also be positively influenced through share buy-backs, fluctuations in foreign exchange, or amendments made to accounting rules & regulations. EPS growth calculations can also be disproportionately large when the base figure is small or negative, making comparisons against peer groups difficult.
Revenue
Revenue is a key measure of growth, & it is a simple & effective metric to drive performance, resulting in it being easily understood by employees of all levels, creating clear line of sight between employee behavior & business success.
Cash flow
Cash flow prioritizes the generation of cash in the short term to bankroll daily operations, pay dividends to shareholders & underwrite share buy-backs. It focuses on profitable growth by controlling expenses, strongly linking it to long term shareholder value creation.
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