The purpose of performance measurement is to track how employees and their actions add value to an organization. For public companies, this value is typically reflected in shareholder returns and capital market valuations. But how can executives making operating decisions know how those decisions are going to be received by the market? If a new investment or acquisition adds $100 million in revenue, how will that affect the share price? What about $50 million in EBITDA (earnings before interest, tax, depreciation, and amortization) or free cash flow? And what impact will a cost-cutting initiative have if it improves operating margin by 3 percent?

The reality is that the answer to each of these questions depends on an array of factors.  The cost-cutting initiative may end up reducing revenue or even EBITDA, resulting in a net negative share price reaction. Just as the acquisition that brings in $100 million in added revenue or $50 million in EBITDA may require so much capital that overall the transaction drives returns lower.

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