BSC and systems of financial motivation

Much has been said about involvement of ordinary personnel in implementation of Balanced Scorecard and development of strategy maps.  If company top management has a very vague idea about urgent problems of their business, the image of their customer, customer demands, products produced by rival companies, then a strategy map developed by top managers will have nothing to do with reality.

BSC and systems of financial motivationThink about this: who can provide top management with the most complete information on regular or one-time customers of the company?  Head of departments?  Well, in some cases yes.  But that will be a general description, and such information will be quite useless.  But ask a sales manager or a front line employee who contacts with customers every day.  He will give you the full story of relations with customers, current and ongoing problems, suggestions as to improvement of customer relations etc.

Thus, it becomes clear that personnel at all company levels must be involved in implementation and maintenance of Balanced Scorecard.  But how will you explain the benefits of this system?  How will you motivate personnel?  Financial motivation proved to be the best.  But development of fair and effective system of financial rewarding and compensation together with implementation of Balanced Scorecard proved to be quite problematic.

Top managers of companies, participants of conferences and seminars dedicated to Balanced Scorecard and business owners have different problems in regard to development of an effective reward system in balance scorecard.  Some people claim that their attempts to implement BSC failed because their reward and compensation system failed to stimulate relevant conduct.  Others say that it is impossible to change human contact without proper reward.  It needs mentioning, that an increasing number of companies are willing to communicate compass agent systems with Balanced Scorecard and strategy maps.  Some companies even offer to include strategy maps to motivation models only after Balanced Scorecard and strategy maps take roots in the company.

Even if we suppose that rewards and bonus system plays an important role in implementation of Balanced Scorecard (or any other system that changes company conduct), it wouldn’t be fair to think that reward and bonus mechanisms are key success factors. Just to the contrary, there are numerous cases and examples when motivation systems were built in accordance to the company strategy and values, but employees nevertheless showed conduct that differed from the kind of conduct to be rewarded.

When employees were asked questions why they neglect actions that would result in rewards, employees answered that bonus and reward programs were based on very simplistic approach to workforce as an instrument.  Employees were following certain conduct patterns not because they wanted to earn more or less, but because they wanted to make their own contribution to implementation of what they think to be company goals.  Some employees just wanted to do something that is characteristic of their profession.

In the last several decades the U.S. companies chose the approach of so-called “bribery” (in a good sense of this word).  So, company management pays different bonuses to employees in key positions or include them to shareholder council just to retain them.  But this does not always work.  When dealing with highly qualified employees the company should know that it needs them more than these employees need the company.  First of all, these people must know the company goals, mission and values.  Secondly, they should be interested in personal achievements and personal responsibility.  Thirdly, they want to be respected not as personalities only, but also as professional in a particular business area. That is why company management and owners have to be very cautious when introducing reward and bonuses systems.

Reward system and Balanced Scorecard

Effectiveness of reward system depends on many factors, and that’s why it is impossible to say if such system will effectively work with Balanced Scorecard project.  It’s not a secret that personnel behavior very much depends on financial rewards.  There are many reward system types, but will analyze the following two: behavioral control and profit sharing.

Before implementation of any reward system one should answer the following question: what is the key goal – behavioral control or profit sharing?  If we’re talking about profit sharing then reward systems will be the method of sharing profits among company employees.  At that, Balanced Scorecard and strategy maps may be used to evaluate performance and contribution of individual employees, departments, business units etc.  After that, such evaluation will predetermine the way profits will be shared among employees.  In simple words, the better employee works and the greater contribution he made to implementation of strategic goals, the more money he gets.  It is also very important to decide what profits are meant (department, company or corporation level).  It is recommended to introduce such reward system on the department level in order to ensure better cooperation between departments and business units.

But if reward system will be used for direct behavioral control the premium package must be analyzed from a different angle.  Money used as “fuel” for behavioral control system should be viewed as operational expenses which do not depend on company profits.  These expenses occur as company doing business and they do not depend on financial results.  It sometimes happens that the company still has to pay bonuses even if it suffers losses.

There is another reason which explains why reward systems should be communicated with Balanced Scorecard.  It does not refer to logic “stimulus-reaction” characteristic of most reward systems, but rather to ability of top management to demonstrate their true faith in Balanced Scorecard.  If company is ready to reward employees’ efforts in implementation of goals in such perspectives as customers, internal business processes and learning and growth, it means that company owners and top management really believes in the great power of Balanced Scorecard.  Such belief or faith will be enough to introduce some system to reward personnel.

Any organization that is thinking about communicating of its Balanced Scorecard with reward system should consider all positive and negative effects of such collaboration.

Balanced reward system should be based on static and dynamic indicators.  Balanced Scorecard system should not be limited to a set of goals, but it should establish balance between dynamic indicators and final/intermediary results.  If the reward system contains only individual goals or focuses on behavior or results, it cannot be considered balanced.

When developing and implementing reward and bonus system the company should not focus only on financial and pseudo-financial payments, and instead consider a serious of other reward types that can meet demands and expectation of an employee.  Rewards can vary from material things that have certain market value to nonmaterial ones to which an employee may give a high praise.  Nonmaterial rewards can be hardly evaluated in monetary terms (for example, meeting with an experienced leader manager, attendance of closed seminar or having free time for a personal project).

Implanting Balanced Scorecard to reward system

No matter what rewards the company wants to introduce, financial or nonfinancial, they can be communicated with the Balanced Scorecard and strategy maps.  Company top management may show faith into the Balanced Scorecard and their readiness to pay bonuses according to the statement “you get what you ask for”.  But rewards may draw personnel attention to certain conduct.  In order to influence employee conduct indicators in the reward system should be:

  • Verisimilar.  Indicators should arouse trust.  The first opposition line is the thought “Perhaps, this is wrong.”
  • Considered reasonable.  The second opposition line is critical opinion “Well yes, this has nothing to do with our business.”
  • Related to any known action.  The third opposition line is exclamation “Well, it’s a pity it is not so, but we can do nothing about it.”
  • Related to any action for which an employee receives reward.  The last opposition line is the statement “I can do something about that, but what for?”

Only if indicators are trusted, and they are reasonable and related to any action performed by an employee, they will truly influence organization conduct.

It is also very important to decide according to which indicators employees will be rewarded.  As known, there are leading and lagging indicators.  So, imagine that employees are rewarded for such leading indicators as “number of visits to customers” or numbers of calls to customers.  In any Balanced Scorecard these indicators play an important role, as usually the more customers know about the products and services the more they buy.  But it wouldn’t be fair to reward employees just for visiting customers or calling them.  Of course, such indicator should be evaluated.  But reward is something that is given for certain results.

Summary

To sum it up it needs mentioning that Balanced Scorecard would barely work without proper motivation of personnel.  Financial motivation proved to be the most effective.  So, reward and bonus system in the company should be well integrated to Balanced Scorecard and strategy maps.  If employees receive rewards for fall success they will have a distorted concept of company strategy.  In such a way successful implementation of Balanced Scorecard becomes impossible.