a) Outline the objectives of performance evaluation

• To assess and ensure that management actions and decisions are in line with strategic objectives.
• To act as a motivational tool in providing a framework to guide and measure managers decisions.
• To help in improving decision-making across an organisation by ensuring that decisions are informed and based on key performance indicators.
• To provide timely, relevant information on areas needing management attention, thus acting as a control mechanism.
• To enable managers to understand the needs and expectations of the various stakeholders in an organisation.

b) Distinguish between inter-firm comparisons and benchmarking as a form of performance appraisal

Benchmarking is a continuing activity where a business or division seeks to copy or become like another successful business and achieve a similar level of success. It involves identifying a successful business or part of a business and using that business as a standard to follow. There are three principal approaches to benchmarking:

1. Competitor benchmarking is a process of comparing ones financial performance with that of direct competitors.

2. Process benchmarking where data is exchanged between companies with similar operating and administrative systems, with the objective of learning from one another and improving efficiencies.

3. Strategic benchmarking, which compares businesses that possess similar organisational structures and implement similar business strategies.

Inter-firm comparison is the process of comparing the performance of different companies, subsidiaries and investment centres. Performance is compared by preparing key accounting ratios to assess the businesses that are performing above average and those that are not. This can provide good control information for managers of poor performing companies to initiate appropriate measures to improve performance. For managers of companies performing above average, the challenge is to try and continue this performance level. To be informative and to ensure management receive realistic control information, inter-firm comparisons require that the comparative process only involves; businesses within the same sector, businesses of similar size, businesses that employ similar accounting policies.

Both benchmarking and inter-firm comparisons are extremely effective ways of appraising and improving the performance of a business. One of the key elements in both procedures is the preparation and interpretation of key financial performance measures.