BalanCed SCore Card for VariablePay Management

The Balanced Scorecard has emerged as a proven and effective tool in our quest to capture, describe, and translate
intangible assets into real value for all of an organization’s stakeholders and, in the process, to allow organizations to
implement their differentiating strategies successfully.
Characteristics
Balanced scorecards to be effective and useful should have the following characteristics:
1. Balanced scorecards should highlight a company’s strategy by focusing on cause-and-effect relationship. Assume LG
Ltd. aims to be a low-cost manufacturer and accelerate growth. The balanced scorecards should pinpoint specific
objectives and measures in ‘learning and growth perspective’ which could improve internal business processes. These, in
turn, would result into greater customer satisfaction, larger market share, higher operating income and shareholder
wealth.
2. Balanced scorecards should help in communicating the strategy formulated to all members of an organization by
translating the strategy into a coherent and linked set of understandable and measurable operational targets. Subsequently,
managers and employees take actions, based on scorecard, to achieve the firm’s strategy. To facilitate decisions and
actions in accordance with scorecards, it is preferable to develop scorecards at the division and department levels.
3. In profit-seeking companies, the balanced scorecard gives strong emphasis on financial objectives and measures.
Sometimes managers give too much importance to innovation, quality and customer satisfaction though they may not
produce tangible benefits. A good balanced scorecard considers non-financial measures as a part of a strategy or
programme to achieve and improve future financial performance. When financial and non-financial performance
measures are properly linked in balanced scorecards, many non-financial measures serve as leading indicators of future
financial performance.
4. The balanced scorecard limits the number of measures used by identifying only the most critical ones. Avoiding a
proliferation of measures focuses management’s attention on those that are key to the implementation of strategy.
The scorecard highlights sub-optimal trade-offs that managers may make when they fail to consider operational and
financial measures together. For example, a company for which innovation is key, could achieve superior short-run
financial performance by reducing spending on R&D. A good balanced scorecard would signal that the short-run
financial performance may have been achieved by taking actions that hurt future financial performance because a
leading indicator of that performance, R&D spending and R&D output, has declined.
A Scorekeeper, the management accountant designs reports to help managers track progress in implementing strategy.
Many organizations have introduced a balanced score card approach to manage the implementation of their strategies.
The balanced scorecard does not focus solely on achieving financial objectives. It also highlights the non- financial
objectives that an organization must achieve to meet its financial objectives. The Scorecard measures an organization
performance from four perspectives:
🖸 Financial
🖸 Customer
🖸 Internal business processes
🖸 Learning and growth
A Company’s strategy influences the measures it uses to track performance in each of this perspective.
It’s called the balanced scorecard because it balances the use of financial and non-financial performance measures to
evaluate short-run and long-run performance in a single report. The balanced scorecard reduces managers’ emphasis
on short-run financial performance such as quarterly earnings. That is because the non-financial and operational
indicators, such as product quality and customer satisfaction measure changes that a company is making for the long
run. The financial benefits of these long-run changes may not appear immediately in short-run earnings, but strong
improvement in non-financial measures is an indicator of economic value creation in the future. For example, an
increase in customer satisfaction, as measured by customer surveys and repeat purchases, is a signal of higher sales and
 income in the future. By balancing the mix of financial and non-financial measures, the balanced scorecard broadens
management’s attention to short-run and long-run performance.
The four Perspectives of the Balanced Scorecard:
1. Financial Perspective:
This perspective evaluates the Profitability of the strategy. Because cost reduction relative to competitors, costs and
sales growth are key strategic initiatives, the financial perspectives focuses on how much of operating income and
return on capital results from reducing costs and selling more units.
2. Customers Perspective:
This perspective identifies the targeted market segments and measures the company’s success in these
segments. To monitor its growth objectives, number of new customers and customer’s satisfaction.
3. Internal business process Perspective:
This perspective focuses on internal operations that further the customers’ perspective by creating value for customers
and further the financial perspective by increasing shareholder value. Chipset determines internal business process
improvement targets after benchmarking against its main competitors.
The internal business process perspective comprises three sub processes:
1. The innovation process:
2. Creating products, services and processes that will meet the needs of customers, aiming at lowering
costs and promote growth by improving the technology of its manufacturing. The operations process:
Producing and delivering existing products and services that will meet the needs of customers. The
strategic initiatives are (a) improving manufacturing quality reducing delivery time to customers and
(b) Meeting specified delivery dates.
3. Post sales service providing service and support to the customer after the sale of a product of service. Although
customers do not require much post sales service.
4. Learning & Growth Perspectives:
This perspective identifies the capabilities of the organization must excel at to achieve superior internal
processes that create value for customers and shareholders.
A Company’s learning and growth perspectives emphasize three capabilities:
1. Employee Capabilities measured using employee education and skill levels.
2. Information system capabilities, measured by percentage of manufacturing processes with real-timefeedback and
3. Motivation measured by employee satisfaction and percentage of manufacturing and sales employees(line
employees) empowered to manage processes.
Balanced Scorecard: Implementation
Implementation of a balanced scorecard system of performance measurement is most successful when the entire
organization is aware of it and supports it. The manner in which the organization’s management communicates the
role, the use, and the benefits of the balanced scorecard to its employees is one of the most important factors in
successful implementation of a balanced scorecard. The balanced scorecard needs to be introduced byillustrating the
sequence of cause-and-effect relationships, the way the perspectives are linked, and the reasons why meeting the goals
at the bottom level make it possible to meet the goals at the next level up, which in turn make the next level of goals
possible, and so forth.
It is important for senior management to support the program, even as high as the board of directors. The boardof
directors can also have balanced scorecard goals. Having balanced scorecard goals for the board of directors creates
support at the very top of the organization, and the support filters down.
Each business unit and division should be involved in developing its own customized scorecard, based on the
company’s overall objectives and the action items that the unit needs to achieve in order to contribute to those
 objectives. Involvement of the scorecard users builds their support. However, the scorecards as developed by middle
managers need to be reviewed and approved with input from senior management to make sure they are congruent with
the company’s goals.
The actual scorecard report for a business unit should be organized according to the four perspectives, with each
selected scorecard measure on a line and classified within its perspective. The target can be in one columnfollowed by
the actual results in the next column. Results that are in line and out of line can be identified, perhaps by color. Each
manager should be accountable for specific lines on each report, and a division head is accountable for all the lines on
the divisional report. A good, balanced scorecard report can also identify trade-offs that managers might make, for
instance by reducing R&D spending to achieve short-run financial goals,or making other trade-offs that could hurt
future financial performance. The decline of R&D spending or other problems would be signaled.
The balanced scorecard needs to be marketed to both management and staff to garner support. Internal promotion
of the program should take place through various media, such as print, verbal, and electronic means. A brochure can be
used to explain how the balanced scorecard will help achieve the company’s long-term goals in a way that merely
tracking financial performance cannot. Employee newsletters can be utilized to feature the balanced scorecard
program and report on results. If improvement in market share is one of the metrics and market share in fact improves,
an article can be written to highlight the factors that contributedto the positive results. On the other hand, if a metric is
not met, an article can explain the reasons and outlinea plan to correct the situation.
🖸 Verbal communication can occur in regular employee meetings where management reviews the results and gives
employees the opportunity to ask questions. One-on-one conversations between supervisors and employees can
provide opportunities for the employees who are closest to the work to point out waysin which the program can
be improved. Suggestion systems, programs inviting employee comments, and employee training programs can also
be used to enlist employee support, and managers must be willing to listen to criticism and to make changes. It is
essential that employees get the sense that management takes their ideas seriously, responds to them, and rewards
useful ideas, because if employees feel that their input is ignored they may conclude that the pro-gram is a wasted
initiative.
🖸 General results of the balanced scorecard program can be posted on the company’s intranet, with links to the overall
corporate goals that each balanced scorecard result supports. In addition, the company can give senior managers
password access to detailed results on the company’s intranet (internal network) for their use in decision-making.
Linking employees’ bonuses to their goal attainment can align employee interests with the goals. Aligning
compensation with balanced scorecard results maximizes the balanced scorecard’s use and effectiveness.
Balanced Scorecard: Reporting
Software can be used to provide balanced scorecard performance information to interested parties. However, installing
dedicated balanced scorecard software does not mean that the balanced scorecard has been implemented. Specialized
software merely tracks the results of a balanced scorecard program. A business must develop its own balanced scorecard
for each unit, undertake the implementation project, and follow up on the results.
Difficulties with Balanced Scorecard for measuring Performance
There are several problems with the balanced scorecard:
🖸 The efficacy of the balanced scorecard in achieving the organization’s strategic goals must be monitored closely. If all of
the non-financial targets are achieved but the financial targets are not achieved, then probablya strong causal relationship
does not exist between the non-financial indicators chosen for monitoring and the financial goals. The non-financial
indicators may need to be re-evaluated and changed.
🖸 In order to implement balanced scorecard performance measurement, a firm must have extensive enterprise
resource planning
🖸 If the balanced scorecard is used as a “command and control” document that is used to control behaviour, employees
may “make the numbers” but not be committed to achieving the organization’s goals. Instead, thebalanced scorecard
should be used to create an environment in which everyone can learn and grow.
🖸 Non-financial data is not subject to control or audit and thus its reliability could be questionable.
🖸 It is difficult to use scorecards for comparisons across business units because each business unit has its
individualized scorecard. Scorecard evaluation is more effective when it is used to judge the progress of an
individual business unit relative to the prior year or relative to its goals rather than when used to compare a
manager’s performance with that of other managers or a segment’s performance with that of other segments
Remark and Conclusion:
If developed and used properly, the balanced scorecard is an effective method of developing strategies and
evaluating progress toward meeting goals.
8.6.1 Balanced Score Card for Variable Pay Management
The balanced scorecard is a performance evaluation technique that takes into consideration a number of financialand
non-financial performance indicators. When combined with a pay for performance system, the balanced scorecard
provides a strong management tool for driving organizational success.
The Balanced Scorecard states that linkage with compensation plans brings cultural change, improved financial
performance and increased employees’ understanding of strategic objectives, resulting in improved organizational
performance. Though creating this linkage is a complex process, it is essential for successful and efficient
implementation of the Balanced Scorecard. There is an increasing trend in firms to shift from traditional financial based
performance measurement and incentive compensation system to integrating financial and non-financial measures.
Use of Balanced Scorecard for this purpose is an example of this trend. Kaplan and Norton suggest that the Balanced
Scorecard should be aligned with the organizational incentive or reward management system at the final stage of its
implementation. Others also support the claim for consistency and alignment of the performancemeasurement system
with reward and incentive structure in organization. Traditional compensations systems focus on short-term goals and
objectives making it impossible to achieve long-term strategic objectives. Linking the rewards and incentives to
Balanced Scorecard would allow better alignment of organization towards its strategies. This would also result in
coherence of individual’s personal goals and objectives with the overall goalsand objectives of the organization.
Employee compensation, one of the largest expenses in any organization, is also one of the least managed. While
transparent data and scorecards have improved the management of other aspects of performance greatly, compensation
often goes unevaluated beyond the fundamental measure of incremental costs. The invisible nature of compensationT
leads to problems. These include failing to differentiate pay for performance, over- and/or underpaying jobs relative
to the market, having compensation spending grow faster than revenue and allowing employees to suspect that they
are not being paid fairly.
A compensation scorecard collects and displays the results for all the measures that an organization uses to monitor
compensation and compare compensation among internal departments or units. It can be used to:
🖸 Help organizations detect and prevent compensation problems.
🖸 Make compensation decisions and actions more transparent.
🖸 Improve the quality of compensation decisions.
While the process of measuring and communicating results on a balanced scorecard of performance metrics likely
will drive a degree of organizational success, many organizations add to this motivation by linking the scorecard to
pay rewards.
The final step in the process of building a pay-for-performance program from the balanced scorecard foundationis to
develop a reward structure. In the conceptual reward structure, a variable pays reward structure (red line) isbuilt around
the achievement of goals ranging from a threshold to maximum level of performance.
Performance at the target level results in a market level of reward. Performance at the threshold results in a below-
market reward. Performance at a maximum level results in an above-market reward.
Companies using this concept of a reward structure predetermine the threshold, target and maximum
performancelevels they want to reward, and the range of market level rewards they intend to provide
matched to the range ofperformance levels.
Typically, the pay-for-performance reward is in the form of a lump-sum cash award so that rewards have to be re-earned
each year; however, some companies have factored the balanced scorecard results into the determination for making
annual salary increases, as well.
Because most organizations have a salary structure with ranges built around market-based midpoints, the reward
structure above may be designed as a mix of salary increases and lump-sum payments. A greater mix of salary
 increases are provided when an employee’s salary is below the midpoint; and a greater mix of lump sums are provided
when an employee’s salary is above the midpoint.
Using a compensation scorecard can greatly increase an organization’s compensation effectiveness. Because it istrue
that what gets measured gets done, it is critically important to measure and manage compensation. With theright
measures, organizations can use what they spend on compensation more effectively to help execute their strategy.

PERSPECTIVE QUESTION EXPLANATION

Gives rise to targets that matter to

What do existing and new customers :
Customer
customers value from us? Cost, Quality, Delivery, Inspection,
Handeling and so on.

What processes must we excell

Internal Aims to improve internal
at to achieve our financial and
processes and decission making.
customer objectives?

Considers the business’s capacity to

Innovation Can we continue to improve and maintain its competitive position
and create future value? through the acquisition of new skills
Learning
and the development of new products.

Covers traditional measures such as

How do we create value for our growth, profitability and shareholder
Financial
shareholders? value but through talking to the
shareholder or shareholders director.
Figure 8.4 : Balance Scorecard
Illustration 22

“Taj Laguna Royal” is an exclusive resort located in a famous place of Andaman & Nicobar Island that
vows toisolate its guests from the hustle and bustle of everyday life. Its leading principle is “all
contemporary amenity wrapped in old-world charisma”. Each of the resort’s 20 villas has a separate
theme like Castle, Majestic, Ambassador, Royal Chateau, Coconut, Lemon, Balinese etc. and guests often
ask for a specific villa when theymake reservations. Villas are Ideal for families or friends travelling
together and these villas feature luxurious accommodation spanning two floors. Since it is located within
a 100-acre estate on white sand beach, the resortoffers its guests a wide variety of outdoor activities
such as horseback riding, hiking, diving, snorkeling, sailing,golf and so on.
Guests could also while away the day relaxing in the pool and availing themselves of the resort’s world-famousspa
“Taj Heaven Spa”. The dining room, which only has three tables for the public, is acceptable proud of its 5-star rating.
Required
Develop a Balanced Scorecard for “Taj Laguna Royal”. It is sufficient to give two measures in each of the four
perspectives.
Solution:
Balanced Scorecard of “Taj Laguna Royal”

Objectives Performance Measures

Financial Perspective (i) Economic Value Added
(ii) Revenue generation per villa
Customer Perspective (i) Percentage of repeat customers
(ii) Customers’ complaints
Internal Business (i) Rating of Spa for its services
(ii) Staff hours per guest
(iii) % cost spent for maintenance
(iv) Rank for restaurant in the context of services
Innovation and Learning (i) Retention of employees
(ii) New types of services to offered in near future