Strategy, Balanced Scorecards and Incentive Systems

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Strategy,Balanced Scorecardsand Incentive
Systems

• Chapter 20

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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

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Balanced scorecard

• Four perspectives
• Financial
• Customer
• Internal processes
• Innovation and learning
• Inter-related
• Understanding the relationships leads to improved
  operations and financial position

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Balanced scorecard development

• Decide where you want to go
• Strategy
• Determine how to get there
• Critical success factors
• Activities
• Determine how to measure your progress
• Measurements
• Targets

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Balanced scorecard development

• Strategy map
• Flowchart depicting the relationships between the
  four perspectives

Critical success factors
Strategy
Activities
Measures
Targets
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Balanced scorecard development

• Critical success factors
• What 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
• Activities
• More specific
• Must be performed to achieve CSFs

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Balanced scorecard development

• Measures
• Leading
• Provide guidance
• Lagging
• Provide feedback
• All measures are lagging, not all are leading
• Targets
• Challenging, yet attainable

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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

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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

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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

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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

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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

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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

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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