1. Strategy, Balanced Scorecards and Incentive Systems
Chapter 20

2. 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

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

4. 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

5. Balanced scorecard development
Strategy map
Flowchart depicting the relationships between the four perspectives
Strategy
Critical success factors
Activities
Measures
Targets

6. 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

7. Balanced scorecard development
Measures
Leading
Provide guidance
Lagging
Provide feedback
All measures are lagging, not all are leading
Targets
Challenging, yet attainable

8. 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

9. 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

10. 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

11. 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

12. Incentive systems Current rewards? Deferred 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

13. Incentive systems Form of compensation? All salary Stock
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

14. 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