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Most executives agree that there is no magic formula-or one right measure-for evaluating business performance. Therefore, in an effort to capture the essence of business performance, many companies are creating new performance measurement systems that include a broad range of financial and nonfinancial measures.
Although we know much about the use of financial measures in companies, our knowledge of these new, nonfinancial performance measures is limited. To determine the scope of current practice, we surveyed top executives in U.S. Fortune 500 firms and in Canadian Post 300 companies. The study was sponsored by the Michael J. Coles College of Business at Kennesaw State University and funded by the Canadian Institute of Chartered Accountants. Study results indicate that top executives in both countries believe that nonfinancial measures are important. But the study also identifies two serious drawbacks: (1) Although nonfinancial factors are viewed as important, they may not be measured, and (2) Even when nonfinancial factors are measured, they may not be used. (For a description of the study design and survey sample, see sidebar.)
THE STUDY OF NONFINANCIAL PERFORMANCE MEASURES
Although much is being written about nonfinancial performance measures, very little is known about actual current practices. The objective of this study was to provide a comprehensive picture of the process of nonfinancial measurement. Specifically, the study examined the degree to which top executives in Fortune 500 and Post 300 firms identify particular nonfinancial performance factors as important, whether firms are measuring important nonfinancial factors, and whether or not companies actually are using nonfinancial performance factor information in their planning processes.
The questionnaire asked study participants to indicate, using a five-point scale, the importance of each of 21 nonfinancial performance factors in setting company goals. For discussion purposes, we have grouped the factors into five general categories: customer service, market performance, innovation, goal achievement, and employee involvement.
The five categories of nonfinancial performance measures are illustrated in Figure 1. For each individual performance measure, the figure shows of the 253 firms in the total sample: (1) number of firms identifying the factor as important, (2) number of firms actually measuring the factor, and (3) number of firms actually using the factor in the planning process.
An individual factor was identified as highly...