A practical approach for risk‐adjusting performance

Abstract

Purpose Risk management has grown increasingly popular in recent years due to the recognition that risk should be as actively managed as performance. A key objective of risk management is to evaluate performance in the context of the relative volatility in which business operations are undertaken. However, accomplishing this has generally proven difficult. This paper aims to present a practical approach for risk‐adjusting performance. Design/methodology/approach This paper presents a practical risk‐adjustment methodology that is based on a popular statistical measure. The utility of the approach is demonstrated in two practical examples: the first is an industry example and the second is an M&A example. Findings The results of the research suggest that the risk‐adjustment approach presented here could become an important part of both performance management and risk management programs. Research implications/limitations The approach detailed in this paper facilitates the practical risk‐adjustment of select performance measures and risk measures. As this is an introductory paper, further research could be conducted on the specifics of the risk‐adjustment process as well as the strategic context in which measures are risk‐adjusted. Originality/value This paper introduces a practical approach of risk‐adjusting performance that was inspired by a popular statistical measure, which is demonstrated in two practical examples.

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