The Balanced Scorecard as a Performance Indicator - Report Example

Key performance indicators such as employee satisfaction, satisfaction, and quality, are measures that organizations continuously seek to improve upon. The balance scorecard (BSC) is considered an ideal tool and is being increasingly used by organizations to tie compensation or incentive programs to performance (Walker, 2008). Such a strategy is supposed to communicate the departmental expectations in the overall organizational strategy. The BSC incorporates data relative to financial and non-financial drivers to improve the systems of performance measure (Kaplan & Norton, 1996). Companies often link compensation to scorecard measures because they believe that tying financial compensation to performance is a powerful lever. However, to get the right and intended results, the company must have the right measures on the card. The data should be valid and reliable so that unintended and unexpected consequences do not arise (Kaplan & Norton, 1996). The Eddison Electronics Company (EEC) should focus on long-term objectives rather than on short-term measures. If the compensation is linked to the performance right away, this strategy could lead the organization in the wrong direction (Walker, 2008). A strong ethical culture is essential to communicate and educate the employees on intolerant and inappropriate behaviors. This could also be subsequently measured on the scorecard. The top management leads by example and they should set the example of ethical behavior. Using the BSC has its advantages because the company does not have to rely on short-term financial measures as the indicators of the company’s performance. However, there are certain barriers to its strategic implementation (Evans, 2002). No one in the organization understands the strategies of the organization (vision barrier), people have objectives that are not linked to the strategies of the organization (people barrier), resources are not properly utilized such as the budgets are not linked to strategy (resource barrier), and management spends too little time on strategy and too much time on short-term decision-making (management barrier). All these barriers can lead to wrong measures when compensation is linked to performance. Traditionally the organization is viewed from four different perspectives against which data is collected and the performance measured against the goals set. These include the learning and growth perspective, the business process perspective, the customer perspective and the financial perspective. The BSC enables to measure not what has been done but also how well it has been done. When linking compensation to performance, companies handle multiple objectives and weight is assigned to each objective (Kaplan & Norton, 1996). The incentive compensation is calculated by evaluating the extent to which each weighted objective was achieved. If the business unit over achieves on some objectives and falls short on others, the employee still earns good amount of incentives on an average. However, if the targets are not achieved, the employee earns no incentives. Under the circumstances, he would be tempted to undertake unethical or wrong actions. This is exactly what happened at Snow Brand Milk in Japan, when they were falling short in their business process perspective and the customer relationship perspective. Unethical behavior can result if the wrong performance measures are used to tie performance measures to compensation. The employees were made to produce results under pressure, which Kohn describes as a controlled environment similar to punishments. Such an environment is not conducive to learning, exploration and progress and in fact can have disastrous results. Snow Brand Milk, the largest producer of milk and dairy products by 2000 in Japan, was so powerful that when consumers saw the Snow Brand, they wanted nothing else. Due to market changes and deregulation, competition intensified. Snow Brand was forced to bring down the prices as private brands could be found on the shelves. The managers were under pressure to cut costs but still maintain product freshness. Under pressure to meet targets, the plant managers led the factory units to resort to unethical and unhealthy production conditions. This surfaced only when a disaster struck affecting 13000 people. One of the three primary reasons was attributed to pressure for results which forced the plant managers to resort to unethical and illegal actions (Finkelstein, 2005). Kohn (1993) also reiterates that leadership is diluted when compensation is related to performance. At Snow Brand Milk also there was absence of senior executive leadership. When there are no guidelines on what is appropriate and inappropriate, some people push their efforts in the wrong direction. Under pressure, others too join in. The strategy at this company was wrong because people were under pressure to produce results, which forced them to resort to unethical practices. In another instance, the project manager of an engineering construction firm called up the CEO from the site saying he understood the mission and objectives of the company and was willing to work in accordance with these objectives, but he did not know how to translate these words into actions (Kaplan & Norton, 1996). Very often there is no link between the different objectives as these are prepared by managers at different levels. In one company, the financial and the customer objectives were formulated by the senior executives, the business processes and the learning-and-growth objectives by the next level of management. This can give rise to impractical objectives and goals thereby encouraging the employees to resort to wrong actions. People respond when the results are measured. The criteria set in the BSC to ascertain performance are difficult to measure. It can produce wrong results and also encourage unethical behavior. Compensation related to performance has always been considered as an extrinsic motivation but it has been found time and again that the benefits and changes are temporary. While compensation related performance has become an important toolkit to optimize the human resources, such measures can lead to pay inequality, at the same time impacting the economic performance (Lewis, 1998). Organizational resources also pose a barrier to effective implementation of the BSC. There is a positive relationship between managers’ need to create a budgetary slack and budgeting systems that emphasize the achievement of budget targets (Langevin & Mendonza, 2010). Slack occurs when there is information asymmetry between the subordinate managers and their superiors. The managers tend to present a distorted picture of the business possibilities to their superiors and they may not disclose all the information. They may understate revenue forecast as managers tend to act in their self-interest. Such a system may encourage data manipulation and hence budgetary systems should be so designed to limit unethical behaviors. If the budgeting system is fair, it can reduce unethical behavior. Corporate budgeting encourages managers to lie and cheat and sets colleague against colleague (Jensen, 2001). In a reputed beverage company, the Vice President - Sales, under-predicted demand for the holiday season. He wanted to ensure a low revenue target which he was sure to exceed. The consequences cost the company in a big way. They were unable to meet the demand as they ran out of their core product in one of their largest markets at the height of the season. When the employees are driven to perform better by imposing the objectives and standards, when they are not involved in setting the standards, and in making the assessment and awards, the results can be disastrous (Lewis, 1998). This does not serve to enhance commitment and on the contrary can drive the employees to undertake unethical activities. Unethical can also be in the form of suppressing facts from the management. As the Business Financial Analyst, I would strongly recommend that the compensation should be linked to the scorecard performance measures once the BSC has been used in the organization for one year (Walker, 2008). This would ensure that all individuals understand the information represented in the scorecard and how to use this information in decision making and process changes. When all are familiar with the data and the data has historical record, the data is less likely to be manipulated. Moreover, they would be responsible for their own rewards and incentives. Internal controls have to be strong so that the organization is able to verify that the data is accurate. Any performance related compensation must define the performance standards, which define how the job has to be performed, must have clear objectives, and the performance of the objectives needs to be measured (Lewis, 1998). The results of the monitoring should be fed back to the employees so that they know where they stand. Moreover, the employees should be given incentives for their accomplishments and not for their ability to hit targets. This would reduce the incentive to cheat the organization or resort to unethical actions. The compensation plan should be linear – the managers should still be rewarded for good performance but not linked to budgets and targets. This would reduce the incentive to cross several hurdles at the cost of the company. The linear bonus schedule rewards people for what they actually do and not for what they say they can do (Jensen, 2001). Since there would be no targets to exceed, there would be no need to feed false information or lie to their superiors. This would also free the managers to devote their time to enhance performance and take good business decision. References Evans, M.H. (2002). The Balanced Scorecard. Retrieved from: http://www.exinfm.com/training/course11r.doc. Finkelstein, S. (2005). When bad things happen to good companies: strategy failure and flawed executives. Journal of Business Strategy, 26 (2), 19-28. Jensen, M.C. (2001). Corporate Budgeting is Broken - Lets Fix it. Harvard Business Review. Retrieved from: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=321520 Kaplan, R.S., & Norton, D.P. (1996). Using the Balanced Scorecard as a Strategic Management System. Harvard Business Review. Retrieved from: http://156.1.240.11/data/strategicplan/Harvard%20Business%20Review%20article%20BSC.pdf Kohn, A. (2000). Why incentive plans cannot work. Harvard Business Review, September-October 1993. 54-60. Langevin, P., & Mendonza, C. (2010). How can Organizational justice moderate the unethical behaviors induced by budgeting systems? Retrieved from: http://www.em-lyon.com/ressources/ge/documents/publications/wp/2010-05.pdf Lewis, P. (1998). Managing performance-related pay based on evidence from the financial services sector. HUMAN RESOURCE MANAGEMENT JOURNAL, 8 (2), 66-77. Walker, M. (2008). Tying Compensation to the Balanced Scorecard. Retrieved from: http://www.associatedcontent.com/article/1037606/tying_compensation_to_the_balanced_pg4.html?cat=3 Read More