Tying pay to the balanced scorecard

Tying pay to the balanced scorecard

Incentive compensation is a powerful tool in getting staff to think about the objectives of the company and their business units. And linking this element of the reward package to the balanced scorecard focuses the attention of employees on the measures that the organisation feels are critical, say Robert Kaplan and David Norton in a recent edition of People Management.

Perhaps the critical issue facing organisations today is how to enlist the hearts and minds of all their employees. As Kaplan and Norton observe: Even those employees involved in direct production and service delivery must strive for continuous improvements in quality, reducing costs and process times to meet customers’ expectations and to keep up with the competition.

But how is this to be done and how can it be measured? Employee satisfaction surveys may not measure engagement, and it is engagement in the strategic process which is vital.

Using the balanced scorecard

For Kaplan and Norton, strategy-focused organisations use the balanced scorecard to align their employees to their strategy in three ways: through communication and education, personal and team objectives, and through reward.

The balanced scorecard, which was originally devised by Kaplan and Norton a decade ago, has become the framework for linking employees’ everyday actions to company-wide strategic objectives :

• It provides a new language that helps employees to understand the organisational objectives and the cause-and-effect links among them.
  

• They can then set personal objectives that, if met, help to achieve the organisation’ s strategy.
  
• And aligning incentive pay with strategic objectives provides both the motivation and the feedback for successful strategy implementation.
  
  

When individuals understand how their pay is linked to achieving strategic objectives, strategy truly becomes everyone’ s everyday job, Kaplan and Norton claim.

Key design issues

The authors have found that the details of how incentive pay links to the balanced scorecard differ for each of the organisations they have studied there is no preferred or dominant approach.

But Kaplan and Norton reckon a number of issues arise when designing a method of tying compensation to the balanced scorecard. These include:

• Speed of implementation — the link should be deferred for six to 12 months, since the initial scorecard represents only a tentative statement of strategy, which may be modified in the light of experience
  

• Objective versus subjective measures — it is usual to link compensation to the outcomes of employee effort, such as the number of new customers signed up, the amount of particular products and services sold, or the volume of sales, instead of input measures.
  
• The number of measures — many executives believe that there should be between four and seven measures, although Mobil in the US has more than two dozen measures.
  
• Individual versus team — these measures involve managing trade-offs and tensions. Many companies use a mixture of both.
  
• Compensation in rapidly evolving environments — companies need the flexibility to modify internal processes, critical skills and IT in order to implement rapidly changing tactics and action plans.
  
  

Want to know more?

Title: Marked impact , by Robert Kaplan and David Norton, People Management, 25 October 2001.

Availability: Contact the People Management subscriptions department, tel: 01795 414864 or jump to PM online . . . www.peoplemanagement.co.uk.

Posted 4 December 2001