Key Performance Indicators

Quick win: KPIs

KPIs are a useful tool that help investors understand and assess performance “through the eyes of management”, who use their discretion to determine which measures are key. Similarly, an increasing number of companies are using non-GAAP measures as KPIs (also referred to as alternative performance measures (APMs)) to explain company results which also carry a significant amount of management judgement. 

Why KPIs are important to the CRUF

The CRUF has identified barriers to investors’ understanding of the rationale for the KPIs, the appropriateness of the measures, and their alignment with company strategy and executive pay. Clarity on these measures – for example, through greater transparency or third-party assurance – is vital for investor confidence. 

The current problem with disclosures and what the CRUF would like to see

Click the tabs below to reveal what CRUF would like to see for each of these current problems

Lack of clarity on appropriateness

There can be concerns about appropriateness of certain KPIs.

Without an understanding of why a measure has been chosen, and whether or not it has been adjusted from a GAAP/IFRS measure, users may be unable to make an assessment on the appropriateness of the KPI.

Greater transparency

This could include an explanation of why the measure has been chosen and, if it has been adjusted from a GAAP/IFRS measure, providing a detailed reconciliation to the non-GAAP/IFRS number. Although there are regulatory requirements on this (e.g. ESMA’s Guidelines on Alternative Performance Measures for EU-quoted companies), disclosure quality is variable.
Reliability

KPIs are rarely included in audited financial statements and therefore assurance is not provided by a third-party on appropriateness, accuracy or compliance with relevant regulatory requirements.
Third-party assurance

The CRUF would welcome assurance over KPIs featured by companies to provide greater confidence on the relevance and reliability of these key measures.
Consistency over time

There are concerns that certain KPIs may not be constructed with a consistent methodology over time. Changes in methodology and periodic adjustments may distort relevance, reliability and comparability.
Consistent methodologies and articulation of changes

The CRUF would welcome continuity over time on KPIs, with any changes that are made period-to-period clearly quantified and explained. Although there are regulatory requirements on this (e.g. ESMA’s Guidelines on Alternative Performance Measures for EU-quoted companies), disclosure quality is variable.

If there is a change in the definition of a non-GAAP number, reporting on the old non-GAAP measure should continue alongside the new non-GAAP measure for a period of time. This will allow the investment community to understand the trend and transition. In addition, companies should explain why they have stopped reporting any measures and, where possible, supply other relevant figures instead.

This will help improve the reliability of the information

Link to executive pay

There is a concern that there is not always a clear link between executive pay and the KPIs of the business.
Incentivise long-term sustainability

Executive pay should be well structured and clearly linked to the company’s strategic objectives, KPIs, APMs, and, if the IASB’s proposals move ahead, MPMs. It should reward those executives who contribute to a company’s long-term sustainability and success.

Increased transparency

Clearly disclosing both the KPIs used to determine executive pay, and the targets that were set, would add further transparency to how pay has been determined. These elements are already required in the UK under Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and Companies (Miscellaneous Reporting) Requirements 2018.

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