Strategy,Balanced Scorecards

and Incentive Systems

Chapter 20

Balanced scorecard

Performance guidance and evaluation system

Depicts the causal factors of success

Balance between

Financial and non-financial measures

Leading and lagging indicators

Long-term success and short-term results

Balanced scorecard

Four perspectivesFinancial

Customer

Internal processes

Innovation and learning

Inter-relatedUnderstanding the relationships leads to

improved operations and financial position

Balanced scorecard development

Decide where you want to goStrategy

Determine how to get thereCritical success factorsActivities

Determine how to measure your progressMeasurementsTargets

Balanced scorecard development

Strategy map

Flowchart depicting the relationships between the four perspectives

Critical success factors

Strategy Activities Measures Targets

Balanced scorecard development

Critical success factorsWhat must you do well to succeed?

What will cause you to fail if you do not do it well?Ex. On-time delivery for Fedex

ActivitiesMore specific

Must be performed to achieve CSFs

Balanced scorecard development

MeasuresLeading

Provide guidance

LaggingProvide feedback

All measures are lagging, not all are leading

TargetsChallenging, yet attainable

Incentive systems

$ Motivate desired actions and performance

$ Assumes

$ Desired performance can be identified

$ Performance can be measured

$ Compensation can be based on performance

$ Form of compensation is motivational

$ Financial

$ Non-financial

Incentive systems

$ Not as easy as it sounds

$ What is the “right thing” to do?

$ Efficiency vs. effectiveness

$ The results of the “right thing” may not be apparent for years

$ The “right thing” may conflict with personal interests

Incentive systems

$ How much of the “right thing” is enough?

$ Challenging but not impossible targets

$ Individual must have control over items that trigger the rewards

$ Measurements must be observable, verifiable and appropriatte

$ Not subject to manipulation

$ Deepwater Horizons

$ Cost-benefit must be considered

Incentive systems

$ Absolute or relative performance?

$ Compared to target or to peers?

$ Absolute may be possible for some, impossible for others

$ Relative may reward inadequate performance

$ Objective or subjective measures?

$ Objective may not consider the whole picture

$ Subjective may lead to confusion, resentment

Incentive systems

$ Current rewards?

$ Immediate gratification

$ Ignores future performance in favor of current results

$ Deferred rewards?

$ Less motivational

$ Focuses on long-term performance

$ May motivate managers to stay

Incentive systems

$ Form of compensation?

$ All salary

$ May increase or reduce risk-taking

$ Stock

$ Aligns performance with best interest of investors

$ May result in stock price manipulation

$ Bonuses (financial or non-financial)

$ May “cap” performance once target is reached

Incentive systems

$ Ethical considerations

$ Which stakeholders to consider

$ May motivate enrichment of stockholders, management, at the expense of employees, community, environment, etc.

$ Poorly designed incentive system may lead to dysfunctional behavior

$ Manipulation for personal gain

$ Short-term results overshadow long-term sustainability