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August, 2004

Making Scorecards Actionable Newsletter # 10/2004

Balanced Scorecard and incentive systems

Now and then the question of integrating the performance according to the scorecards with the reward systems is brought up. Since it seems to be an interesting topic to many practitioners, following we include some of our opinions on how to reward performance

A balanced incentive system should be based on drivers as well as outcome metrics. In our view, a balanced incentive system should not only include a range of goals (regarding finances, customers, processes and learning and growth), but also strike a balance between drivers and outcome. If the incentive system only contains singular goals, or if it solely focuses on either behaviour or results we don’t regard it as balanced.

Even when multiple goals are used in a scorecard, it can be used in different ways. One practice we have come across is to aggregate all measurements in the scorecard into one combined index. Even though this index is an aggregate of different indicators, the rewards will only be based on one dimension. However, it is more in line with the intentions of the scorecard to keep the different metrics separate also in the incentive schemes. The more transparent the system is, the better. Hence, all or some measures should be selected from the different perspectives and be used as explicit denominators in the reward structure.

Some managers seem to view financial incentives as the only available reward to offer, while others experiment with various kinds of rewards. In the literature, for example, we have found examples of companies that have not been allowed to implement financial incentive systems (due to existing agreements with trade unions) and hence have tried to emulate financial reward systems. Doing so, they have implemented systems where e.g. points are awarded instead of money. These points can in turn be exchanged for valuables; for example merchandise, tickets, hotel nights et cetera. Although they are not defined as financial rewards, they carry an obvious monetary value (since the recipients can use the points to purchase items that they will otherwise have to use cash to buy).

We believe that the manager should think beyond financial or pseudo-financial bonuses when designing a reward package, and consider a range of different types of rewards that target each individual receiver’s needs or wishes. Such rewards can range from tangible and apparent items with an obvious market value (pseudo-financial rewards) to intangibles that may be appreciated by the receiver, but are difficult to set a price on (such as meeting an interesting thought-leader, attending a closed seminar or getting time off for a personal project et cetera).

Marketing literature has elaborated on the need for personalized offerings and customisation. Companies should stop treating every customer the same, and instead recognize that they are all individuals with different needs and different expectations. Every client should be served as an individual. In a similar way, reward mechanisms should be tailored to reflect the desires and requirements of different employees.

Instead of trying to create one reward system that is equal to all, the company could try to create a set of reward mechanisms that are as specific to the individuals as possible. Instead of relying on money, which has a high generic value but no specific value (the employee has to turn the money into something that she considers valuable), management should try to understand their employees’ interests and aspirations, and offer them rewards that are aligned with these.

Such rewards, which also embed a meaning and a thought, are often most appreciated. These rewards may sometimes carry a low generic value (they cannot be changed into something else), but a high specific value. An alternative to a financial bonus could e.g. be an experience, such as if an employee gets to attend an interesting seminar or meet his favourite football team. In between these extremes (pure financial rewards versus individual experiences) are of course a host of different alternatives. Ranging from points exchangeable for goods and merchandise, via fringe benefits such as domestic services, to time off for studies, experiences or sabbatical. According to the literature 3M, which is famous for its innovative capacity, rewards its successful employees with time, not money. Time that the employees’ must spend on non-core activities. Over the years, this incentive mechanism has also proved to be valuable to the company, since many new and profitable innovations have come out of these periods of absence.

The structure in the balanced scorecard promotes multidimensionality. Hence, the compensation packages linked to the scorecard should also allow rewards in different dimensions. Instead of applying the same reward formula to everyone, the organization should tailor the rewards to suit each individual employees’ aspirations and dreams.




MAKING SCORECARDS ACTIONABLE NEWSLETTER is a bi-monthly update on our experiences and opinions on how scorecards and strategy maps can be made actionable – to help organizations realize their intended business strategies. The newsletter is compiled and distributed for free by the authors of the book “Making Scorecards Actionable – Balancing Strategy and Control”. Also make sure to check out www.makingscorecardsactionable.com to get up to date information about our seminars, to evaluate your organization’s BSC skills according to our computerized BSC Analyser and to download presentations from the document archive.
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