Owners often use financial and nonfinancial benchmarks to evaluate the performance of their managers. The benchmarks, which correspond to the best practices of organizations, may be available inside or outside of the organization. For HISF, the benchmarks could be from similar hotels, either within or outside of the Hospitality Inns chain. Suppose Brett is responsible for HISF’s revenues, costs, and investments. To evaluate Brett’s performance, Chungi would want to benchmark a similar-sized hotel—one affected by the same uncontrollable factors, such as location, demographic trends, or economic conditions, that affect HISF. If all these factors were the same or very similar, the differences in the performances of the two hotels could, for the most part, be attributed to the differences in the two managers’ performances. Benchmarking, which is also called relative performance evaluation, filters out the effects of common uncontrollable factors.
Can the performance of two managers responsible for running similar operations within a company be benchmarked against each other? Yes, but this approach could create a problem: It could reduce the managers’ incentives to help one another. When managers do not cooperate, the company suffers. In this case, using internal benchmarks for performance evaluation may not lead to goal congruence.