What are Key Performance Indicators (KPI)?

Key performance indicators (KPIs) are written goals for companies, departments within companies and often individual employees.

How Do Key Performance Indicators (KPI) Work?

Let's say John Doe is the CEO of Company XYZ, and he wants the company to 'produce higher-quality products' next year. How can John tell whether that has occurred? How will he measure it?

One way is through KPIs. He might, for example, tell his vice president of customer service that her bonus next year will depend on the following things:

  • Number of customer refunds for defective products decreases by 20% over last year.
  • Number of complaint-letter responses decreases by 10% over last year.
  • Number of repeat customers increases 5% over last year.

He might tell his vice president of production that her bonus next year will depend on the following things:

  • Number of defective products decreases by 30% over last year.
  • Production line stops no more than five times per year for retooling due to line problems.

And he might tell his vice president of procurement that his bonus next year will depend on the following things:

  • Less than 10% of supplies are returned to vendors due to defects

Every business's KPIs are different, but the idea is to give people measurable, indisputable expectations so that they know when they are succeeding and when they are failing.

Why Do Key Performance Indicators (KPI) Matter?

The idea behind KPIs is that you can't manage what you don't measure. By breaking down goals into measurable pieces of work, KPIs help organizations reach their goals. They also improve morale by showing employees, in writing, exactly what they have to do to receive good reviews, raises or other incentives.

KPIs cannot solve every problem, however. Often, matters of culture, morale and ethics require a softer, intangible form of management.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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