KENNETH C HOLMES
APPLIED MANAGEMENT ACCOUNTING
PROFESSOR: JASON CADE
FEBRUARY 8, 2015
PHASE 4: INDIVIDUAL PROJECT

The Balanced Scorecard, performance measures and ethics:
To start, performance measures and ethics are key elements in today’s business and industry and are closely related. The Balanced Scorecard is ethical management, whether in relation to the public sector: where managers answer to the public and taxpayers, how and where tax dollars are directed, or the private sector: where managers answer to the public and the government. The Balanced Scorecard is essential for managers to objectively assess and concisely report levels of service and productivity, demonstrate competence, and meet the ethical values of trustworthiness, respect, responsibility, fairness, caring and citizenship.
The Balanced Scorecard is a performance management system designed to guide management in: balancing financial and nonfinancial measures; developing short-term and longterm goals; balance performance drivers (leading indicators) with outcome (lagging indicators); providing a complete picture of the organizations performance; and lead to strategic focus and organizational alignment. The Balanced Scorecard starts from the top: the mission comes from the top and states why the organization exists, why they do what they do, why they are in business; the vision inspires a culture of teamwork and creates a winning organization. It comes from experience in the business world and is based on the knowledge of what works and what does not work; the strategies are short-term and long-term, and determine how the organization accomplishes its goals; and the measures are indicators of their progress toward accomplishing their goals.
The performance measures are management-approved determinants of performance thresholds, requirements, and expectations that must be met to be evaluated at a particular level of performance. For successful implementation performance measures must be objective, reasonable, realistic, achievable, and measureable so the goals can actually be reached, and the program must be comprehensive and include monitoring and accurate assessment for the success of each employee. The measures must be established at every level, stated clearly in writing in the employee performance standards guide, and in terms of specific measures that will be used to appraise performance including: quantity: how much work is produced, what error rate, etc.; quality: how well work is performed or how accurate and effective the final product is; timeliness: how quickly and by what date the work is produced; and cost-effectiveness: addresses cost savings, and working within or below the budget.
Performance measures should: determine how effective and efficiently the product and/or service satisfies the customer base; identify improvement opportunities; enable management to make decisions based on facts and data, and not opinion; translate their customer expectations into strategic goals; evaluate the quality of the process; track improvements; focus organization efforts toward the customer; and support the organizations strategies.
Unethical behavior that can result from using the wrong performance measures:
For starters, employers have the absolute right to expect employees to behave according to company policy, to expect employees not be involved in deceitful behavior, that employees not be forced to do things against their conscience, and to expect all parties to live up to their commitments. Unfortunately there will be employees on all levels who will actively participate

in behavior that does not conform to company policy, or the law. The following are examples of those behaviors.
Deliberate deception which involves lying about something to accomplish a goal, and includes: taking credit for someone else’s work, sabotaging someone else’s work, hiding/stealing someone else’s work to keep them from using it, stealing sales from another sales person, misrepresenting products or services to get the sale, defaming someone’s character to gain their customers/business, etc.
Violation of conscience involves requiring an employee do something unethical or illegal to keep their job, it also involves coercion involving sexual harassment, and includes: your boss threatening to fire you unless you sell 200 microwave ovens that you know are of poor quality or defective, instead of the better quality model; your boss or fellow employee using your gender, orientation or handicap to devalue your ability to do your job, all in an effort to get you out of the competition; your boss asking you to sex it up (use your feminine or masculine wiles) to obtain the sale of the product or service; withholding a promotion if you do not make your goals; any situations where an employee is asked to do something against their conscience to keep their job or gain a promotion.
Failure to honor commitments is clear as day, examples include: being promised extra time off if you finish a project by a certain date, or achieve or exceed your sales or productivity goal, then your boss conveniently forgets and does not make good on their promise; an employee agreeing to complete their part of research or a project by a specific time, but delivering late or not at all; a sales person setting more appointments than they can actually pursue in a given time frame; missing appointments with clients that cause them to be unsure of your commitment, or to not want to do business with your firm; etc.
Unlawful conduct involves activities that are clearly illegal, examples include: offering bribes to clients for purchasing their product or service; padding an expense account with nonbusiness expenses; hijacking/stealing copyrighted or patented company property (recorded music, film work, company designed product and service ideas) and selling them on the black market to keep the profits; sexual and nonsexual harassment; etc.
Complete disregard of company policy which involves actions that achieve a goal without conforming to protocol or company policy, and include: deliberate deception; coercion; making deals with clients without company authorization; bribery, sexual and nonsexual harassment; etc.
How to avoid these behaviors:
There are many ways a company can avoid unethical or illegal behavior, and in the process avoid an embarrassing or legal situation. Create Code of Conduct/Code of Ethics which is a formally written document clearly stating the type of conduct and behavior the company expects, outlines what behaviors are acceptable and unacceptable, and what measures are taken if an employee violated the Code of Conduct. The employer should lead by example and use the values they want their employees to follow for their employees to duplicate.

Employers must hold employees responsible for their actions and reinforce the consequences.
Any unethical or illegal actions must be followed by the necessary measures outlined in the Code of Conduct. Human Resources should also inform and have new employees sign the Code of
Conduct , ensuring they fully understand and must comply with the code, and that any actions that do not comply will have consequences. The employer should always set reasonable and achievable goals to minimize and/or eliminate unethical practices. The employers should also encourage friendly competition and not accept/tolerate cut throat or abusive practices.
The employer should show committed employees their appreciation through acknowledgement, promotion or new position, a raise, more responsibility, etc. The employer can schedule an ethics trainer to visit the workplace to discuss ethical behavior and explain why ethics important in any organization. Ethics trainers use role-playing, motivational speaking, videos and handouts to stress the importance of ethics in the workplace. It should also be required that all employees attend the ethics training, and sign a roster to prove they attended.
The employer should create a system of checks and balances to minimize opportunities for unethical behavior. For example, a camera system could be in place to allow management to monitor employee behavior, and make sure all employees know they can be watched up close. A camera system is beneficial for both internal and external monitoring of theft. Have several employees in a given area (registers, departments, etc.) to inhibit unethical or illegal activity.
Have a hotline for employees to report unacceptable behavior anonymously. To avoid hiring the wrong people, employers need to not only look at the candidates experience and skills, whether they can perform the position they are applying for, they also need to evaluate the candidate for their ethical values to determine and ensure they are a good fit for the company culture.
How to tie performance measures to compensation:
For starters, many companies tie compensation to performance, so it is important to point out the potential negative effects. It may actually hurt team collaboration because some team members may avoid working with others who they believe are less capable, in the process excluding many employees from more rewarding projects. Competition for limited rewards can actually create a hostile work environment replacing trust and cooperation with self-promotion.
It may increase employee conflict because there are always those employees who will do anything to get to the top without any regard for workplace respect and in the process step on everyone’s toes. It may be difficult to evaluate performance objectively because the relationship between an employee and the supervisor can create counter-productive inequities. Employees may be reprimanded for not making goals when the real problem may be factors outside the employees control such as an underproduction or poor marketing. It may induce employees to take fewer risks because their paycheck could suffer, in the process reducing creativity and innovation.
There are many approaches and attitudes about pay-for-performance. One school of thought believes bonuses are the most reasonable approach. They believe bonuses improve performance on firm-wide basis and rewards superior performance. The problem is not everyone should get a performance based bonus each year and it can expand morale issues. Another school of thought believes gauging performance based on compensation does not work, and may

actually degrade performance. They believe incentive systems need to be based on what the company wants to recognize, and then create the program around that. Another school of thought believes there are more people involved than just the performer. Quite often there is an assistant or team working behind the scenes to generate research, leads and sales, in this case management will need to proportion the compensation based on the team and not just one person. Another case is where the assistant or team does nothing; in this case compensation should be shared among the producers and not everyone. Another school of thought believes in paying high generous commissions for sales with no caps, but not paying expenses. For non-sales, if you perform, you stay on the team and share the reward; if you leave the team you get no reward.
Another issue being dealt with globally is executives being paid bonuses for short-term gains at the expense of long-term sustainability. To address this issue, several large firms have come up with creative solutions. Intel has instituted a say-on-pay program that links employee compensation to sustainability results for its entire workforce. Every employee’s annual bonus is determined based on the firm’s performance on measures including: product energy efficiency, completion of renewable energy and clean energy projects, the company’s reputation for environmental leadership, and reducing the company’s carbon footprint.
National Grid’s compensation plan is based on the company’s greenhouse gas (GHG) reduction goals, their goal by 2020 is a 45% reduction, and by 2050 they expect an 80% reduction. This is huge for a major electric power utility company. Xcel Energy has also tied their compensation plan to the company’s greenhouse gas (GHG) reduction, and actually discloses the details of the target goals and compensation in their proxy statements and their sustainability reports.
Pay for performance pays off when it is executed properly. Two thirds of high performance organizations use pay-forperformance which includes salary increases and annual bonuses, but the times dictate more specific parameters, that parameter is applying the pay-for-performance to their high-performers in an effort to reward and retain them, in the process increasing competition and superior innovation. Less than two thirds of low performance organizations apply pay-forperformance, which reflects in their ranking.
They reward the wrong people, and in the process, they are not keeping their high performers, and not encouraging competition and innovation.
Based on my research, I believe EEC should apply their pay-for-performance program based on performance and sustainability. For sales representatives, their performance should be based on the increase in sales over their goal, and should include staff whose efforts behind the scenes helped facilitate those sales. For team projects, their performance should be based on the team, finishing ahead of schedule, and include improvements in quality and efficiency. All team members will be required to participate and there should be zero tolerance for non-participation.

For non-sales, their performance should be based on increases in efficiency and cost reductions.
This means increases in total productivity vs hours expensed, and reductions in supplies and physical resources used to perform their job.
There are two types of employees, those who are intrinsically motivated: motivated from within to do the best job they can, honestly, ethically, based on a high moral standards, who will stay because they love what they do, and are the high performers; and there are those who are extrinsically motivated: motivated by outside factors including high commission, big bonuses, wanting to please people, who will leave to accept another position for more money, and are the low performers or least beneficial to the organization. EEC’s pay for performance should reward employees who achieve because they are the performers who will take the organization to where they want to be, and not reward people who are in it just for the money.
I also believe EEC should institute an environmental performance program based on product energy efficiency, completion of renewable energy and clean energy projects, improvements in EEC’s environmental reputation, and reducing EEC’s carbon footprint. Since
EEC is still a growing company, they are not provided the luxury of annual increases and bonuses for everyone or for any reason, so they must apply their available financial resources to those employees and teams who provide the highest sales increases, the best improvements in product and environmental efficiency goals, performance improvements, cost reductions, and
EEC’s bottom line. Keeping their high performers will help EEC obtain the kind of competitiveness and innovation that will take them where they want to be.
Responsibility of establishing performance measures:
The people involved in determining and establishing the performance plan and measures are the Vice Presidents (VP’s) of each division and Finance. The VP’s are responsible for the actual establishment of the performance measures and the compensation plan, since they have the knowledge and knowhow to determine which measures are applicable and practical.
The Finance department is responsible for ensuring EEC has the funds to pay for the performance program. Human Resources is responsible for distributing and providing orientation to all personnel about the performance program. I recommend the HR manager require all personnel read and sign the performance program document. This process would ensure their full understanding of the program, and will be used by HR to protect EEC from employees who may have issues with, or who violate the program down the road. Management is responsible for implementing and executing the measures. It is their task to evaluate performance of both the operation and the staff.
It is important that all higher level and management personnel understand the measures and how to apply them. It is also essential that all employees understand how the performance measures and evaluation work, so they can perform and improve the process accordingly. It is also essential that all personnel follow the company Code of Conduct, understand why the code is in place, and fully understand the ramifications for not following the code. All employees must accept their role in enhancing and promoting EEC, as well as protecting EEC from outside threats including: unethical and unlawful behavior, as well as protecting EEC’s reputation.

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