Performance appraisal for F&A Professionals - using KRAs

             A KPI for a function is a measurable value that demonstrates how effectively a function is meeting organizational objectives. KPI needs to be specific, measurable, realistic, and communicated to concerned key functional team members to accomplish.Please refer to my article on KPIs at the below link on my website. article highlights the following aspects:·      List of 30 KPI identified for F&A function.·      KRA defined vis a vis KPI·      Eight activities for a KRA’s driven appraisal system-1st Illustration for GM-F&A·     Eight activities for a KRA’s driven appraisal system-2nd Illustration for AM-F&A·      Activities that can adversely impact the business KPI identified for Direct responsibility areas-15 no’s·      IPO/Equity    Long-term borrowings·      Investments·      M&A or JV·      Board matters·      Cash flows from business operations·      Cash flows from investing activities·      Cash flows from financing activities·      Free cash flows·      Cash burn ratio·      Operating cash flow to current liabilities   ·      Solvency-Debt equity ratio·      Liquidity-working capital·      Liquidity—current ration·      Operating cash flow to capital expenditure KPI identified for Indirect responsibility areas -15 no’s·      Liquidity-Quick ratio·      Profit margins·      Gross profit margins·      Profit before tax·      Earnings before interest, depreciation, and tax·      The expense-to-sales ratio·      Return on equity·      Earnings/share·      Dividend yield·      Return on assets·      Financial leverage·      Accounts receivable turnover·      Days sales outstanding·      Average vendor credit·      Inventory turnoverKRA (Key result areas) ·      While KPIs are targeted at the overall functional level, KRAs are key result areas at individual levels.·      Based on KPIs, KRAs can be identified and articulated appropriately·      Based on KPI, budgeting can be done at the Business unit and at divisional -function levels for the planning of monthly/quarterly performance targets such as the following for F&A team members: §  Key milestones to be accomplished§  Key timelines for milestones§  Revenue & earnings &Proftabilty§  Expenses & costs§  Essential resources, including assets, software, manpower, etc.§  Organisation structure to accomplish the above targets ·      KRA’s can be evolved directly from KPIs, but these ought to be different for different levels  depending on competence, experience, and role envisaged for the level  ·      The template for KRA can be like that of KPI for ease of implementation (Template in the previous article)·      KRAs need to be fixed for each position such that:§  The number of KRA will be different & much lower than the 30 KPI mentioned above vis a vis each position/level. These can be, say, 6 or 8 or 10 or 12, or 16 vis a vis each hierarchical level /position, depending on the role to be performed by F&A professionals holding such levels.§  Each KRA can have a unique % weightage (like for KPI), but the total of weightages for all KRAs must add up to 100 ·      Depending on the organization's size and complexity, the organization structure can have many layers, as below.§  Higher level: Directors-, CEO, COO, CFO/Vice president, General managers, and so on as applicable§  Middle level: Senior manager, Manager, and so on as applicable§  Lower level: Assistant Manager, staff as applicable, or even blue-collar employees if engaged§  The designation & number of levels can be different in different companies.·      There can be many Sub-functions within the umbrella  F&A, such as those listed below, and specialized skills are needed to manage these efficiently. An independent person in large organisations may head each.§  Sales & marketing accounting§  International operations/accounting§  Purchase accounting§  Material accounting§  Costing & expense accounting§  Corporate borrowing§  Corporate investments§  Treasury and cash management§  Banking§  General ledger accounting(P&L,BS)§  Budget, MIS/Dashboard§  Taxation (GST, Income  tax, import duties, Incentives for SEZ/Export oriented units, state taxes, etc.)§  Statutory compliances related (specifically for F&A )§  The secretarial team deals with Board matters -quarterly & annual reports, Dividends, Corporate governance, auditing (Such a team could be a part of the Legal team as well), And so onKRA’s  Driven appraisal system-8(Eight) steps/activitiesIn large professional organizations, annual increments/payouts usually comprise two components and need to be objective, as below.·      Annual Increments over existing pay – Linked to Individual performance based on KRA accomplishment.·      Annual incentive payout/bonus – linked to overall business unit /Company performance based on KPI accomplishment.KRA performance can be assessed on two aspects per the illustrations below.§  Quantitative performance assessment based.§  Qualitative performance assessment based.1st Illustration for appraisal of a GM Position based on the above two aspectsDifferent competencies will apply to different levels/positions. The performance assessment/reward is based on a combined assessment/score on both quantitative and qualitative aspects, with varying weightages at different levels/positions, as illustrated below.i)Quantitative performance assessment is a KRA target -vs. Score-based method. The actual is as belowKRA chose parameter(out of 30 KPI)Weightage out of 100SayUOM     Target*aActual *bDerived /earned ScoreOverall finance costs for the division25Rs x LA1A2A2/A1x25Return on investments20%B1B2B2/B1x20Cash flow from financing activities15Rs x LC1C2C2/C1x15To choose out of 30 KPI12Rs x LD1D2D2/D1x15To choose out of 30 KPI10Rs x LE1E2E2/E1x15To choose out of 30 KPI10Rs x LF1F2F2/F1x15To choose out of 30 KPI 8Rs x LG1G2G2/G1x15Total  score100   85 (Assumed) *a Indicates targets to be fixed by the CFO or an immediate senior person of the appraisee (General manager in this case) at the beginning of each financial year for the review period with inputs from the CEO/MD if necessary.*b indicates to be populated based on YTD-year-to-date actual data based on ERP/IT/internal software compiled by the system and recorded, where inputs from the appraisee could also be obtained to counter any partial recording of actuals.ii)Qualitative performance assessment score based on competence attributes vs. actual  Say for a General manager in FKRAParameterKRA Attributes  /Skills(To capture as relevant for this role) TargetScore *c SayActualscore *d Say Basic functionalSales accounting, fixed assets accounting,  Material accounting, cash flow management, Accounting standards, & so on attributes ….3530Corporate mattersLong-term borrowings, JV/M&A, Equity, Board matters, Forex & so on2015IT/ERP Software:Knowledge of ERP to generate reports, Specialized software for F&A modules  for costing, controlling, audit trails  &  so on157Legal:The Company’s Act 1956,Income tax Act 1961, The Central Goods and Services tax Act 2017,SEBI Act 1992 , RBI regulations & so on108LeadershipTeam building, Change management, Ethics, Analytical skills and so on2020 Total  score10080 *c Indicates the target to be fixed by an immediate senior person of the appraisee at the beginning of each financial year for the review period with inputs from appropriate level HR professionals.*d Indicates to be populated based on YTD assessment of the superior with inputs from the peers of the appraisee +peers of the appraiser and HR professional to avoid any biased for recording the actuals.iii) Once quantitative and qualitative assessments have been done as per the above two tables, an annual appraisal is to be coordinated by the appropriate level HR person (for each appraisee level) by providing advance key inputs to the proposed team members as belowiv) For a robust appraisal system for career planning & development of appraisees, a team comprising the following is suggested for carrying out an annual performance review (in this example of appraisee at GM level in -F&A )FunctionAppraising Team memberF&AThe immediate superior of GM -F&A (appraisee)Customer function1 level higher than GM in any one interfacing function like Purchase or sales, or manufacturingHR1 level higher than GMOther function1 level higher than GM(as invitee) proposed byManagementCFO +COO/CEO or MD in case of Promotion of GM v)Usually, the corporate HR team lays down policies of rating individuals as Promotable to the next higher level and for rating as excellent, very good, good, below average, and poor, etc., and accordingly determine annual increments or for employees exit  as per the illustration /assumption below§  Excellent =80-100§  Very good=60-80§  Average =40-60§  Below average=20-40§  Poor= below 20vi) In the illustration of GM-F&A, the performance rating based on KRA assessments is shown along with assumptions in the table below.Assessment onAssumed Score earnedAssumed Weightage at General Manager levelDerived Weighted scoreQuantitative  parameters 8560%51Qualitative parameters 8040%32Total Weighted average score  83 The score for GM  falls within range of 80-100, and hence rating can be assessed as Excellent.vii)The appraising team also discusses aspects such as below vis a vis appraisee·      Promotion based on opportunity based on consistent performance over the last few appraisals,·      Transferability to other functions/business units,·      Training & development needs,·      Changes in roles & associated organisation structure etc.·      Effective datesviii) Implementation of the decisions taken in the appraisal meeting as above2nd Illustration for junior management in F&A- Assistant manager (AM) level with “Accounts payable” roleSteps/activities I to iii)These will be similar for AM but with different /applicable skills/competencies, and two tables like for GM need to be prepared.Step iv)The suggested appraising team is indicated below.FunctionAppraising Team memberF&AManager  -F&A (immediate superior of appraisee)Customer functionManager  in Purchase functionHRManager or senior managerOther functionNot necessary   ManagementGM-F&A  +GM-HR  in case of Promotion of AM-Appraisee Step v) similar to earlier for GM-F&AStep vi) Users can populate tables in earlier paragraphs as per the hypothetical example belowAssessment onAssumed Score earnedAssumed Weightage at Assistant Manager levelDerived Weighted scoreQuantitative  parameters 7080%56Qualitative parameters 6020%12Total Weighted average score  68 The score for AM-F&A  falls within the range of 60-80, and hence rating can be  assessed as very good.Step vii & viii) -similar to earlier for GM-F&ACFO/F&A teams can use these concepts to develop performance appraisal methods in consultation with corporate HR and CEO/MD for each level besides these two levels of GM and AM illustrated.Activities that can adversely impact the business §  Providing incorrect inputs to senior management -CFO/CEO/MD with malice intent of assigning  easy targets/goals for  KRA parameters§  The target setting of the following is not objective at different levels.§  Quantitative: No of KRA parameters and their appropriateness§  Qualitative: Biased selection of applicable competencies and their target score§  KRA parameters are neither  -comprehensive nor aligned with KPI and may contain  transaction-related daily routine activities:§  Percent weightages assigned to each KRA or competencies are biased with ulterior objectives of influencing outcome vis-à-vis performance review perspective.§  Targets set are biased (too stretched or loose) to reprimand or favour specific team levels /employees, leading to demotivation/dissatisfaction. §  The actual measurement is captured inaccurately or manipulated by the immediate appraiser with malicious intent. §  Through the back end of the software, the appraiser makes circular changes in the KRA Targets or actuals during the performance review period with ulterior motives and turns off the audit trail to prevent detection. §  Not ensuring restricted access rights to KRA values (both targets & actuals)in the appraisal workflow software in HR, thus enabling persons to make unauthorised changes in targets vis a vis approved KRA.