driving performance pay through balanced scorecard · performance and success. 2. deploy an...

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BY TEAM CEDARCEDAR MANAGEMENT CONSULTING INTERNATIONAL,

CEDARVIEW BSC + STRATEGY SERIES ARTICLE NO. 05

www.cedar-consulting.com

DRIVING PERFORMANCE PAY THROUGH

BALANCED SCORECARD

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Most modern organizations have

become more innovative in terms of their

attraction and retention strategies.

This has been increasingly due to

shareholders’ aggressive demand to be

on top of the league in their businesses

or at least to aspire to get there.

Heavy investments have been made in

marketing, technology, hiring state-of-

the-art advisors, etc. After making all

these investments, they still seem to be

struggling with maintaining their market

share, profitability, and more importantly,

high performing talent, which they may

have actually invested, trained, and

become competent in.

Several attempts have been made

by seasoned HR professionals to

introduce innovative HR and employee

engagement initiatives, and these have

achieved limited measured success.

As businesses have matured, so have

employee expectations, in terms of

both monetary gain and other forms of

individual recognition.

Money matters and HR professionals

often struggle to maintain this balance

and often end up making high-impact

compromises on this scale. Job

security, individual progression, and

career aspirations are prime “drivers

of employeeship” and must be firmly

aligned to enhance shareholder returns,

significantly increased business profits,

and a strong business bottom line,

which are all “drivers of employership.”

Gone are the days when remuneration

practices were “guaranteed as fixed

compensation,” irrespective of how

business has done. In today’s highly

sophisticated business era, only those

with a proven high-performance record

of accomplishment survive the battle in

the global corporate jungle.

Therefore, it has become imperative to

align business performance to employee

rewards, and these are inseparable.

The only enabler to ensure success

is to find a strategic measurement

framework that drives enterprise

performance and directly dovetails itself

into employee performance. Over past

decades, the balanced scorecard has

successfully been deployed by global,

regional, and local organizations who

have demonstrated proven success of

this alignment. This in turn has given

compensation strategies an entirely new

face lift, and HR professionals be forced

to raise the bar in terms of repackaging

compensation payouts through fair,

objective measurement aligned to an

organization’s financial ability to bear

the payout cost. Most successful HR

professionals follow simple, sequential

steps, and these have often given high

returns on an organization’s people

investments. We call this an “integrated

performance pay quadrant.”

1. ALIGN ENTERPRISE AND INDIVIDUAL PERFORMANCE

It is imperative for employees to have

a straight-line view as to how their

individual performance is aligned to

that of the enterprise. The balanced

scorecard is a proven methodology

that seeks to identify and cascade

performance measures from the overall

enterprise to the departmental and/

or functional level. Now, departmental

measures are converted into individual

performance measures, beginning

with department/functional heads and

subsequently cascaded to lower levels of

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management. It is important to note that

the balanced scorecard is an enterprise

wide performance management system

and not an individual performance

management system. Most times,

it is here that HR professi onals lose

the essence of balanced scorecard

measurement and dilute it to individual

performance scorecards, impacting the

“direct line of sight of employees.”

To build ownership for organizational

performance, this is a pitfall that must

be avoided, as it simply encourages

silo thinking of employee performance,

impacting the integration of

organizational, team, and individual

performance. Employees then tend to

assess performance payout linked to only

their individual performance, irrespective

of how the enterprise has performed.

This further deteriorates into irrelevant,

self-centered individual-performance

discussions between bosses and

employees and often ends in employees

getting labeled as not having enough

perspective or ownership of enterprise

performance and success.

2. DEPLOY AN INTEGRATED PERFORMANCE MANAGEMENT FRAMEWORK

Organizations that have deployed a

balanced scorecard framework at times

fail to integrate enterprise performance

with HR owned employee performance

management systems. These tend to

either be executed as parallel systems

or be interchanged among themselves,

often leading to mismeasurement, data

inaccuracies, and miscalculated individual

performance payouts. It is important to

note that the design features of both

enterprise and employee performance

management have a few common

elements and must be integrated at the

first go. These elements are:

◊ Defining measures across financial

performance, customer, process, and

organization

◊ Identifying and agreeing on

appropriate units of measure (UOM)

◊ Ensuring a logical cascade process,

including target setting and actual

measurement

◊ Integrating performance reporting

to ensure ownership for increased

business leverage.

Once the above broad elements are

commonly finalized, only then must

additional design elements unique to

both be built on formats, forms, owners,

processes, special projects, automation,

and reporting mechanisms, among

others.

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This ensures consistency, uniformity,

and common understanding of

performance across the organizational

hierarchy. Further, it facilitates the

building of employee ownership and

nurtures a performance-driven ethos

to excel at individual-employee levels,

ideally translating into enhanced

enterprise performance. HR must, in

parallel, deploy an effective employee

engagement and communication

process on both performance systems

and immediately address any employee

queries. More importantly, it should

seek the assistance of departmental/

functional heads especially to address

queries outside the realm of employee

performance management. At times,

HR tends to guesstimate business

answers that may be misrepresentative

of enterprise performance and winds up

misrepresenting or misunderstanding

the linkage of enterprise and employee

performance, and affecting the final

performance payout.

3. DOVETAIL INTO AN OVERALL COMPENSATION STRATEGY

Performance pay is a measurable

outcome, not an end in itself, and is

one of the components of an overall

compensation framework. Delineation

must be made between fixed and

performance pay compensation

strategies before deployment. The

performance assessment outcome of

an integrated enterprise and employee

performance management process is

linked only to performance pay, which

HR must communicate effectively at

the outset. Employees often mistake

or have a limited understanding of two

key compensation terms, increments

and bonus, a.k.a. performance pay. First,

increments are a function of inflation,

cost of living, and the organization’s

decision on its competitive market

positioning, and are independent of the

performance pay.

Second, performance pay is a function of

how the enterprise and employees have

performed against agreed measures and

achieved related targets. Put together,

both constitute an overall compensation

framework for an organization. From a

shareholder’s perspective, a balanced

scorecard is a “business enabler” that

assists in driving target achievement

for the enterprise and its subsequent

ability to generate a greater pool of funds

that are allocated to performance pay.

From the internal HR’s perspective, the

employee performance management

system uses this allocated pool of money

for individual payouts for different

levels of employee performance. At

times, while designing performance pay

models, the HR misses this important

linkage to enterprise performance, and

while employees are paid out based on

their individual target achievements, this

does not corroborate with enterprise

EMPLOYEES OFTEN MISTAKE OR

HAVE A LIMITED UNDERSTANDING

OF TWO KEY COMPENSATION

TERMS, INCREMENTS AND BONUS,

A.K.A. PERFORMANCE PAY

Cascading the BSC to Align

Enterprise & Individual Performance

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performance and sends mixed signals on

the overall performance ethos.

Globally, compensation trends have

become aggressively aligned to

performance pay. Larger amounts based

on enterprise performance have been

budgeted to reward high performers and

send a strong signal to non-performers.

These practices have led to healthy

internal competition between employees

in order to excel at a strategic as well as

tactical level of role execution through

mutually aligned enterprise and individual

performance measures. Talent attraction

& retention strategies are being enhanced

by sharing significantly larger amounts

of performance pay, especially at the

senior and middle management levels, to

internally incubate leaders of tomorrow.

A balanced scorecard does not drive the

amount of performance payout directly;

however, it brings into focus a measurable,

data-oriented measurement process of

achieving enterprise targets to generate

enhanced profits. The HR must use this tool

effectively to dovetail its compensation

strategy to reward employee performance.

The key is to find the right balance between

how much to pay and an organization’s

ability to do so.

4. SIMPLIFY AND INNOVATE PAYOUT MECHANISM

Employees take ownership for

performance only when they are able

to visualize how much they are able

to earn on target achievement. It is

important for HR to set this “line of sight”

firmly in the beginning itself, along with

a defined payout mechanism that is

simple to understand, easy to deploy,

and employs a database. A balanced

scorecard is a proven success in this

regard, as long as it is implemented

in its true original style of measuring

enterprise performance first and then

dovetailed into employee performance

through tightly defined cascades

of performance measures. Matured

compensation strategies related to

performance pay have to abide by a

few basic tenets of performance-based

payouts. These are:

◊ Individual performance measures

are defined across four balanced

scorecard quadrants–financial,

customer, process, and organization.

Ideally, the number of individual

performance measures must be 6–8

per position. These performance

measures are a direct cascade of the

enterprise performance measures.

◊ Overall payout is based on

both enterprise and employee

performance. Higher weight is given

to enterprise performance at the

senior and middle management

levels, where the ratio is split as

~60:40. These levels of management

have a greater impact on enterprise

performance and a longer term view

of business.

Payout Mechanism linked to BSC

and IPMs

THE KEY IS TO FIND THE RIGHT

BALANCE BETWEEN HOW MUCH

TO PAY AND AN ORGANIZATION’S

ABILITY TO DO SO

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At the junior management level, this

split reverses between enterprise and

employee performance to ~30:70 as

performance measures defined at this

level of management are more focused

on individual delivery and execution.

◊ Payouts are built around target

achievement of the defined individual

performance measures, based on a

weighted average and the cumulative

score linked to a 5-point appraisal

rating scale derived from the Likert

methodology.

◊ Theamountofperformancepayoutis

linked to the annual cost to company

(CTC) of the employee.

◊ Significantlyhigheramountsaregiven

as employees climb up the ranks, from

the middle to senior management

level. The market benchmark is as

follows: senior management ~30–35%

of annual CTC, middle management

~20–25%, and junior management

~10–15%.

◊ Ideally, the above principles

broadly apply across revenue, non-

revenue, and support functions.

However, progressive organizations

do customize parts of the payout

mechanism to bring in functional

premiums as appropriate to their

business strategy and overall market

competitiveness.

As a best practice, nuances of payout

mechanism should be revisited ideally

after every two years to ensure relevance

to existing business dynamics, assess

market competitiveness in terms of

talent attraction and retention, and

more importantly, determine if it is

actually rewarding the different levels of

individual performance. Lastly, in today’s

technological era, faster automation and

ease of data access play an important

role in building employee ownership. The

HR must make an effort to deploy payout

calculators and individual employee

levels so that they are able to review for

themselves the progress they are making

on their target achievements. High

performance achievers demonstrate a

significant degree of self-assessment,

and deploying simplified calculators at

individual levels motivates them to excel

further.

CONCLUSION

Performance pay must be leveraged

to significantly enhance enterprise

performance and simultaneously build

employee ownership. It is imperative that

enterprise and employee performance

are firmly dovetailed in order to ensure

higher shareholder returns. Most

organizations do not get this right first

time around, it takes some time through

regular implementation, and diagnosis

before this is institutionalized. Balanced

scorecard is a facilitative performance

measurement tool that intends to

strategically lend direction to enterprise

performance. The HR must play its role

to integrate it into the overall employee

performance management process. A

fine balance needs to be achieved, and

more importantly, maintained to ensure

that employees are rewarded in line with

improvedsuccessoftheenterprise.■

About Cedar

Cedar is a global consulting, research & analytics firm. With over 25 years of experience, Cedar has assisted more than 1000 clients across industry sectors. Formerly part of Renaissance Worldwide, a $1 Billion consulting firm, co-founded by the creators of the Balanced Scorecard, Cedar has significant capability in the international market strategy, business strategy development, organizational and operational transformation. Cedar, winner of the 2010-2015 Industry Award for The Best Advisory Firm, is headquartered in the US and has a network of offices in 16 locations, worldwide.

For more information, please visit www.cedarconsulting.com or email us at [email protected]

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