Other Financial Management Techniques - Essay Example

? Other Financial Management Techniques Effects of wrong performance measures tied to compensation The effects in the case of wrong performance measures being tied to compensation in the organization have been explained as follows. The level of compensation offered to the employees should take into account the performance in not only one particular area of service especially in case of manufacturing units. The performance of the employees and the organization is optimized with the adoption of the Balanced Scorecard that monitors and motivates the performance of the employees and their contribution to the major four performance fields of the organization, namely the financial goals, customer centricity, internal efficiency and the improvement in the stages of learning through work. The implementation of wrong performance measures would mean that the management has not allocated balanced weight-ages to all these four areas of organizational goals in order to link it to the compensation structure of the employees. The tying of wrong performance measures to the compensation of the employees would mean that it has the likelihood of giving rise to unethical behaviour among the workers and the employees in the manufacturing plants (Tonchia and Quagini, 2010). The examples of wrong performance being tied to compensation include the aspects in which the performance of the employees is linked only with the volume of output with ignorance in the quality of the finished products being produced by the companies. The management often pays more attention to the volume of output and overlooks the quality of the product being offered in the market. Thus linking the compensation structure with such performance measure could lead the employees to adopt short-cut procedures in the process of manufacturing. This would give rise to unethical behaviour among the employees and they would engage in work activities that would allow them to produce more products in the manufacturing process. The concentration solely towards the volume of output may lead to procurement of high amount of raw materials and inventory but the service level of the workers may suffer. This has been shown by the graph given below. The companies may not track important and quality contribution of the employees and may not give reward such activities of the workers are example of wrong performance measures being linked to compensation. This would lead to the decline of the quality of the work in the production unit and unethical behaviours may surface where the employees would be driven to get incentive without meeting the requirements of product quality, service level to the customers, etc. It would also lead to unethical behaviours of performing in such a way that fulfils the short term interests of the employees to get more compensation but compromises on the goals of the organization in terms of meeting the quantity and quality level for several business contracts. Steps of EEC: avoidance of unethical behaviour The Eddison Electronics Company (EEC) is required to active steps for avoiding unethical behaviour in the manufacturing units that produces several electronic items. In order to avoid unethical behaviour, EEC would be required to link the compensation of the employees with the right performance measurement measures. In order to do this, EEC would need to assess the short term and long term goals of the company and the deadlines to be met in terms of the contracts to be delivered over the period of time. This would enable EEC to understand the exact requirement from their workforce or the output required from the workforce in terms of both volume of the output and the quality of service to their customers. EEC would need to link the compensation of the workforce with the various areas like financial targets of the company, customer service to be delivered, the internal benchmarks of product innovation, quality and steps to maintain high service level for the customers and the initiatives to be taken to maintain a culture for the growth of learning (Niven, 2005). This would help the people of the organization to understand that the organization does not expect only the volume of output to meet the deadlines of the contracts for delivery. The employees would realize that the organization expects its people to maintain the desired level of product quality for electronic items and also maintain a high level of customer service in the industry. The fact that compensation is not linked only with the output but also at producing optimum level of different components of the electronic items and spare parts in order to reduce the inventory of the company would reduce unethical behaviours among the workforce. The workforce would not tend to engage in activities of producing spare parts that require less time but do not result in increased production of finished goods. The unethical behaviour of compromising on the quality of the products and the service level would be reduced by the employees. Thus, appropriate and balanced linkage of the compensation structure with the performance in several areas of organizational goals would help to reduce the unethical behaviour and at the same time increase the turnover of business. Tying performance measures to compensation at EEC The ways in which EEC should link the performance measures to the compensation system in order to reduce the unethical behaviour of the workforce and at the same time achieve the organizational goals as per the policies of the organization have been explained as below. EEC is a manufacturer of the electronics items and has launched a new 1.5 GB computer memory chip in the market. Thus EEC would need to prepare a Balanced Score Card that takes into account the organizational goals in the short term as well as in the long term. EEC would be keen to generate revenues from the sale of the 1.5 GB computer memory chips to the maximum limit as well sustain the revenue from the other electronic products that are manufactured and sold in the market. Thus EEC would divide the goals of the organization into four major field of the Balanced Score card that requires to meet the financial targets of the company, the service level to be delivered to the customers, the efficiency of the internal processes at EEC and the growth of learning as part of the organizational culture to meet the future goals (Olve and Sjostrand, 2006). EEC should attach appropriate weight-age of each of these areas of organizational goals with the compensation to be offered to the workforce. The incentive to be offered to the employees and the workers should also be linked to these areas of organizational goals. In order to attain a higher compensation, the workers would need to contribute for meeting the financial targets of the company that includes the growth of revenues, operating profits, turnover and adequate liquidity of the company in the short term as well as long term. In order to do this, the workers would also need to maintain the internal process quality and operational efficiency for the overall growth of production and quality level of the output. This would lead the workers to adhere to the desired level of turnover of the manufactured products, maintain the turn-around time and provide high quality of service to the customers. By establishing an all round performance measurement system to the compensation of the employees, EEC would be able to reduce the unethical behaviour of the employees that is otherwise intended to take advantage of the gaps in the performance measurement system (Biazzo and Garengo, 2012). Responsibility for establishing performance measures The responsibility of establishing the performance measures is, however, bestowed on the top management of the company. The top management of the company which includes the chairman, president, business heads is accountable for the sustainable growth of business of the company which requires a balanced linkage of the performance of the employees with the compensation being offered. A balanced linkage of the parameters of performance measurement and the compensation offered to the workforce is helpful in triggering activities that aim towards optimal utilization of the resources and attain the organizational goals. The policies framed by the management in implemented by the managers in different hierarchical levels of the company who are responsible for driving the forces of production. By establish right performance measurement systems and tying it in a balanced manner with the compensation structure would provide the right signal from the management that the organization demands an all-round performance from the employees and the workers to achieve the organizational targets in the areas of finance, customer service, internal development and growth of learning (KAPLAN and NORTON, 1996). This would reduce the incidents of unethical behaviour among the workers to fulfil their short term interests of achieving higher compensation that do not fulfil organizational goals. The managers are responsible to implement strict governance within the internal structure at EEC. The managers and the operational heads would be responsible to monitor the activities of the workers and identify any unethical behaviour on the part of the workers. The operational leaders would be required to drive the workforce to produce balanced output that increases the volume of production of finished goods that are in line with the quality standards as prescribed by the organization. Reference Biazzo, S. and Garengo, P. (2012). Performance Measurement with the Balanced Scorecard: A Practical Approach to Implementation within SMEs. Berlin: Springer. KAPLAN, R. and NORTON, D. (1996). The Balanced Scorecard: Translating Strategy Into Action. London: Harvard Business Press. Niven, P. R. (2005). Balanced Scorecard Diagnostics: Maintaining Maximum Performance. New Jersey: John Wiley & Sons. Olve, N. and Sjostrand, A. (2006). Balanced Scorecard. New Jersey: Wiley. Tonchia, S. and Quagini, L. (2010). Performance Measurement: Linking Balanced Scorecard to Business Intelligence. Berlin: Springer. Read More