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Total optimal performance scores: a practical guide for integrating financial and nonfinancial measures in performance evaluation: tops uses Excel Solver, a mathematical optimization tool, to determine the most efficient or top-performing division in an organization and then score other divisions' performance against it.

Article Excerpt
EXECUTIVE SUMMARY Most companies use multiple measures to evaluate employee, departmental, or divisional performance. Aggregating multiple measures is subjective and can lead to employee dissatisfaction and game playing. Now there is TOPS (Total Optimal Performance Scores), which uses an objective, mathematical way to aggregate multiple performance measures into a single performance score.

Today's competitive markets demand a robust performance evaluation. As organizations realize that profit-based models for evaluating performance are inadequate, models that incorporate both financial and nonfinancial measures of performance have started to appear. Although financial measures are generally lagging measures of performance, nonfinancial measures such as sustainability, learning and growth, and internal process improvements are leading measures of performance that can offer insight about future performance. Models that aggregate dissimilar performance measures typically assign targets or benchmarks to individual measures. Because judgment plays a large role in assigning benchmarks to the performance measures, employees may perceive the targets as arbitrary, and, if they do, employee dissatisfaction and game playing can result.

To address this issue, we will illustrate how to implement Total Optimal Performance Scores (TOPS). This mathematical optimization tool uses Excel Solver to determine the most efficient or top-performing division in an organization and, subsequently, scores all remaining divisions relative to the top-performing one. While true optimization finds the best possible outcome, provided all conditions are perfect, TOPS finds the best possible--or top--outcome observed in practice. TOPS evaluates dissimilar performance measures and aggregates the different measures, such as profit and customer satisfaction, into a single score. (1) This approach provides a constantly moving target that employees can strive toward, yet it seems obtainable because at least one unit obtains a top score. Let's begin with a simple performance evaluation model that does not use TOPS and then show one that does.

PERFORMANCE EVALUATION WITHOUT TOPS

Suppose Myers Company, a fictional company, has four divisions (North, South, East, and West) and uses a profit-based model to evaluate the divisions' performances. Myers Company establishes a target, or benchmark, that profit is expected to be 50% of labor costs, with the input being labor costs and the output being profit. Table 1 illustrates the labor costs and profit for the company.

Figure 1 presents each division's performance in comparison to the 50% benchmark. The top left corner of the figure, where profit is highest while labor costs are lowest, represents optimal performance, while the bottom right corner of the figure, where profit is lowest and labor costs are highest, represents the worst performance. The line represents the benchmark that profits should be 50% of labor costs. Any division with performance above the line has a positive performance evaluation, and any division with performance below the line has a negative evaluation. Distance from the line represents how much a division exceeded or missed the benchmark. Under this criterion North, West, and South divisions have profit exceeding the benchmark and positive performance evaluations. East has profit less than the benchmark and a negative performance evaluation. North's performance is the furthest distance from the benchmark line, which means North had the best performance relative to the benchmark.

[FIGURE 1 OMITTED]

In this scenario, North might be dissatisfied being evaluated the same as South and West. Although all three divisions have profit exceeding the benchmark, North's performance exceeds the performance of both South and West. Table 2 shows the performance of each division compared to the benchmark performance: profit as 50% of labor costs. North's performance is 160% of the benchmark, followed by West and South. East failed to reach the benchmark by 8%.

This approach relies upon an assigned...

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