In this podcast episode, we discuss the need for quantity and quality performance targets for accountants.
The Need for Quantity and Quality Targets
The main issue here is to set a mix of quantity and quality performance targets, and the reason is that it takes a really long time to fix mistakes. I’ve never seen any studies about how long it takes to fix a mistake in accounting, but it’s got to be at least ten times higher than just doing it right in the first place. That’s because you have to locate the bad transaction, and then research it, and then formulate a correction.
Because of this enormous time requirement, you can’t just set a performance target for someone to blow through a huge number of transactions and then earn a bonus. If you do that, they earn the bonus and then you spend a massive amount of time cleaning up their debris trail.
Performance Targets for Clerks
So what does a proper mix of quantity and quality targets look like? Let’s say that a person is an accounts payable clerk. You could set a quantity target of entering at least 100 line items from supplier invoices per hour. That part of the measurement is pretty easy, and you can track it right away through the accounting system. The quality target might be no more than one error per hour – but how do you spot it?
The error might be a charge to the wrong vendor, or to the wrong account, or as of the wrong date, or in the wrong amount. There is no automated system to find this. Instead, you’ll need to accumulate these errors as they eventually percolate out of the system, and trace them back to who made the entry.
Which brings up an important point. Quantity measurements can be compiled right away, but quality measurements take a long time, so you can’t have a performance system that rewards accountants in the short term – like at the end of each month. Over that kind of a time frame, you can’t tell if a person is making mistakes. Instead, the tracking period can’t be anything less than three months, and I think even that is on the short side.
Here’s another issue. In some jobs, the work is heavily clerical, such as for a payables clerk, a billing clerk, or a payroll clerk. What I’ve just described would work pretty well for them.
Performance Targets for Skilled Positions
But then you have skilled positions where there’s less volume associated with the work. This might be a general ledger clerk or an assistant controller who puts out the financial statements. In these situations, the output may be only one product per month, which is the financials, where the quantity measure is how fast the financials can be completed. In this case, the quality of the product is way more important than the quantity measure, because you really don’t want to screw up the financials.
So for financials, the performance target is much more subjective. After all, just how accurate are the financial statements? They might be off by a material amount, but no one realizes it for a long time. In this case, the duration of the performance target really needs to be the entire year, until after the annual audit is done. Only then can you tell if the work is correct.
And even then, the performance target isn’t exactly precise. You could set an average of three business days to produce financial statements – OK, that’s measured easily enough. But then the quality target might be that the reported profit or loss for the year is within 5% of the value derived by the auditors. That sounds quantitative, but it also gives the preparer all year in which to correct her mistakes in the monthly financial statements. That means the monthly financials could be off, but the errors are fixed by year-end, so the preparer still gets paid a bonus.
An alternative is to be really subjective and just state that the financials will be prepared with a sufficient degree of accuracy – but what does that mean? So, in short, for the really skilled positions, judging quality can be a problem. I’m not sure there is a good performance target for it. But make sure that quality is included as a target, and give it a high weighting because it’s very important in this position.
Performance Targets for Intermediate Positions
And then we have jobs that are in between the clerical positions and the high-end skilled positions. These positions deal with some volume, and require more skill than someone in a straight clerical job. Let’s use the collections clerk as an example. The usual performance target for this person is how much money they can collect from customers, which is a quantity measurement. Is that really all you want to use? I think a quality measurement still needs to be used here, which whether the collections person pissed off the customer. You can’t tell right away, but track complaints from customers, and also whether those customers ever place any orders with the company again.
That can be a good indicator of quality. And, once again, it takes a long time to measure quality. And the measurement can be subjective.
So, to summarize, there should be a quantity and quality component in the performance measurement system that’s applied to anyone in the accounting department. The weighting should be more on the quality side for the more advanced positions, even though it’s difficult to measure. And finally, you’re going to need to install some tracking systems to collect information about performance quality.