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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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CEDARVIEW BSC + STRATEGY SERIES ARTICLE NO. 05
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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CEDARVIEW BSC + STRATEGY SERIES ARTICLE NO. 05
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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CEDARVIEW BSC + STRATEGY SERIES ARTICLE NO. 05
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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CEDARVIEW BSC + STRATEGY SERIES ARTICLE NO. 05
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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CEDARVIEW BSC + STRATEGY SERIES ARTICLE NO. 05
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 bsc@cedar-consulting.com
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