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 perspectives
Financial
Customer
Internal processes
Innovation and learning
Inter-related
Understanding the relationships leads to
improved operations and financial position
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
Balanced scorecard
development
Strategy
Critical
success
factors
Activities
Measures
Targets
Strategy map
Flowchart depicting the relationships between
the four perspectives
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
Balanced scorecard
development
Measures
Leading
Provide guidance
Lagging
Provide feedback
All measures are lagging, not all are leading
Targets
Challenging, 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