What’s a performance indicator?

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A performance indicator is a pre-established benchmark against which the actual performance of a company is measured. One of the ways a company ensures it is meeting its goals is by establishing desired levels of performance. Benchmarks or indices are determined and defined as performance targets. Actual performance is measured against a performance indicator to identify areas that need improvement.

Most organizations, industries, and even governments establish performance measures. The measures included in a performance indicator can be quantitative or qualitative. For example, the performance of a sales department in an organization may be measured primarily quantitatively against quarterly and annual sales targets. The department is given a target number and the actual sales figure is reported as a percentage in the sales plan.

In the case of the sales department, results of less than 100% on the sales plan would be considered a performance gap. This is the difference between desired and actual performance. Some organizations use the gap value to assess the company’s processes, products, employee training, and leadership tactics that need improvement. A gap analysis can sometimes reveal that a performance indicator is too high given current market conditions.

A performance indicator can also be used by a government to assess macroeconomic conditions. Depending on the results obtained, the government may determine that it needs to take steps to prevent a major depression. Gross domestic product, consumer confidence and commercial contracting activity are some of the economic performance indicators that a government monitors.

Some companies may use industry averages to measure performance. The average revenue and the average time a company’s product remains in stock are some examples of industry benchmarks. This type of comparison is also used by potential investors to determine a company’s overall financial health and estimate its risk.

Subjective measures of performance can be used in employee appraisals and in questions related to corrective action. While many companies have some sort of numerical rating system for their employee reviews, the manner in which they are scored is largely determined by the opinions of the reviewers. For example, an employee might be ranked based on their problem-solving skills, which might be considered impressive by one manager but barely adequate by another. How managers determine what constitutes a good problem-solving skill is largely based on experience and personal preference.

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