What are the benefits of linking Strategic Performance Measurement
systems to exectutive pay?: Evidence from the UK
M. Franco-Santos, Dr. M. Bourne
Centre for Business Performance, Cranfield School of Management
Email: monica.franco@cranfield.ac.uk
The impact of the relationship between Strategic Performance Measurement (SPM) systems
and executive compensation systems is an issue that remains unexplored. This article
presents the preliminary findings of a research conducted by the Centre for Business
Performance, the consultancy firm Watson Wyatt and the global compensation association
Worldatwork. The purpose of the study was to examine (1) the proportion of companies in
the UK that link their SPM system to their executive pay plans; and (2) the benefits of
establishing a linkage between these two management control systems.
The data were collected through a survey, which was completed either in paper form or
through the web. The survey was developed following a review of the performance
measurement and executive reward literature and refined through a pilot study with fifteen
different organisations. The survey was sent to a stratified random sample of 700 large
companies in the UK. The survey was mailed to the HR director and the Finance director of
each of the selected companies. Initial survey mailings were followed up by telephone.
Between January and April 2004, 159 organisations responded to the survey (23% response
rate).
So far there are a number of findings from this survey that can change our perception on
what has been previously reported in earlier research on SPM systems. These preliminary
findings are addressed here in turn.
Firstly, out of the survey respondents, 82% stated that they had a strategic performance
measurement system in place. Key Performance Indicators (KPIs) are by far the most
commonly used performance measurement system in this survey (60% of companies). The
use of the Balanced Scorecard is lower in this survey than has been previously reported
(17.6% of companies). Previous surveys have suggested the Balanced Scorecard is used in
about half of larger organisations. Our results suggest that in the UK the Balanced Scorecard
is popular, but not as widely used as KPIs. This result may have occurred as the survey asked
questions about performance measurement systems usage and it didn’t purely focus on the
Balanced Scorecard. The inclusion of KPIs as a type of measurement system may have
provided the respondents with an alternative to the Balanced Scorecard for their responses.
KPIs are different to the Balanced Scorecard and this suggests that companies are using
financial and non-financial measures, but not in the same proportion as one would expect in
the Balanced Scorecard. The balance is between financial and non-financial, rather than one
financial perspective with three non-financial perspectives.
Secondly, the results suggest that there is a much larger linkage of performance measures
with reward than previously reported. Past research has found that around 45% of companies
in the US were linking their SPM system to executive pay. In this survey, 67% of those
surveyed made the link. Even the companies that didn’t have a formal performance
measurement system linked reward with a mixture of financial and non-financial objectives.
Thirdly, as presented in figure 1, respondent companies are likely to establish a variety of
relationships between SPM systems and compensation elements. These results suggest that
performance measures are not only linked to annual or long term incentive systems as it has
been suggested by authors such as Kaplan and Norton. Strategic performance measures are
also linked to base pay increases. The exact nature of the measures that are linked to base pay
varies from company to company. Some organisations associate some of their people
measures, in particular, their strategic competencies to base pay increases. Others associate
the continuous acheivement of performance targets to a certain increase in base pay as a
reward. The benefits of linking performance measures to base pay could be questioned from
a practice point of view. In our view, companies might be paying twice for the same
achievement (through incentives and through base pay). However, our research does not
provide enough evidence to test the exact impact of this linkage.
Figure 1
Link to annual
incentives only (9%)
Link to annual &
long term
Incentives (1%)
No link (33%)
Link to annual
incentives & base
pay increase (21%)
Link to base pay
increase only (15%)
Link to long term
incentives only (1%)
Link to annual,
long term
incentives & base
pay increase (16%)
Link to long term
incentives & base
pay increase (3%)
Fourthly, companies who did not have formal performance measurement systems relied
much more heavily on personal objectives to reward performance. KPIs and the Balanced
Scorecard have, in much of the management literature, replaced Management by Objectives
(MBO). However, the results of this survey show that along with the SPM system and
meeting Budget, MBO is still a dominant factor for rewarding senior executives.
Fifthly, the main benefits from linking reward with the measurement system are to increase
the focus and understanding of the key strategic objectives. This goes beyond rewarding
success by rewarding the implementation of the strategy for achieving this success. This
suggests that companies are becoming more confident in their belief in how long term
success is achieved and that they believe that rewarding pure financial performance may lead
managers to be too short-term in their outlook.
Finally, linking achievement of strategic objectives to rewards seems to improve alignment
rather than motivation. This finding has implications for the size of the rewards. Our result
suggest that rewarding achievement of measurable strategic objectives is important for focus
and understanding, but how large does that reward have to be given that the effect on
motivation is considerably less? When we fully evaluate our findings we may find the
answer to this question, but our results at least suggest that relatively low level of rewards for
achieving strategic goals may have many of the desired impact without some of the
undesirable consequences of larger incentive packages.
To learn more about the research of the Centre for Business Performance into Performance
Measurement, or to get involved in research and knowledge sharing activities please visit
http://www.som.cranfield.ac.uk/som/cbp/