The problems with a compensation scorecard

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Recently, Barrick Gold, the largest gold mining company, announced the new compensation program that includes a scorecard with several financial indicators. The compensation program is announced as being "shareholder-friendly" and "long-term" and it is aligned with shareholders' value.

For me this approach looks very myopic as it has little to do with company's core business - mining the gold. Here is my short research of the topic:
http://www.bscdesigner.com/the-pitfalls-of-the-compensation-scorecard.htm

Do you think that aligning a compensation plan with shareholder value is a good idea?

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The problems with a compensation scorecard

  1. 1. THE PITFALLS OF THE COMPENSATION SCORECARD Based on http://www.bscdesigner.com/the-pitfalls-of-the-compensation- scorecard.htm By Aleksey Savkin
  2. 2. BSC DESIGNER WAYS TO REWARD EMPLOYEES • There are various ways to reward employees, still the question with the reward of executives is very disputable,
  3. 3. BSC DESIGNER WAYS TO REWARD EMPLOYEES • There are various ways to reward employees, still the question with the reward of executives is very disputable, • And there is no common opinion on this.
  4. 4. BSC DESIGNER WAYS TO REWARD EMPLOYEES • An example with reward scorecard of with the investment management company Man Group,
  5. 5. BSC DESIGNER WAYS TO REWARD EMPLOYEES • An example with reward scorecard of the investment management company Man Group, • The focus of the scorecard is still on the financial indicators.
  6. 6. BSC DESIGNER WAYS TO REWARD EMPLOYEES • The usage of the scorecard and KPIs for the evaluation of an executive’s job is supposed to make the process more transparent and oriented on the results,
  7. 7. BSC DESIGNER WAYS TO REWARD EMPLOYEES • The usage of the scorecard and KPIs for the evaluation of an executive’s job is supposed to make the process more transparent and oriented on the results, • But in most cases it actually does the opposite – adds unnecessary KPIs that are a very rough model of the company’s business and has nothing to do with the declared vision.
  8. 8. BSC DESIGNER AN EXAMPLE • At the end of March 2014, Barrick Gold Corporation, the largest gold mining company in the world, announced the redefinition of its compensation plan.
  9. 9. BSC DESIGNER AN EXAMPLE • At the end of March 2014, Barrick Gold Corporation, the largest gold mining company in the world, announced the redefinition of its compensation plan. • This is now presented as “Most Shareholder- Friendly System.”
  10. 10. BSC DESIGNER AN EXAMPLE • Let’s have a look at the announced scorecard and discuss the possible benefits and disadvantages of the suggested approach.
  11. 11. THE PROBLEM WITH THE COMPANY’S VISION
  12. 12. BSC DESIGNER THE PROBLEM WITH THE COMPANY’S VISION • In the case with Barrick the vision is “to be the world’s best gold mining company by operating in a safe, profitable and responsible manner.”
  13. 13. BSC DESIGNER THE PROBLEM WITH THE COMPANY’S VISION • In the case with Barrick the vision is “to be the world’s best gold mining company by operating in a safe, profitable and responsible manner.” • The mission sounds very similar to the vision: “to be the world’s best gold company by finding, developing and producing quality reserves in a profitable and socially responsible manner.”
  14. 14. BSC DESIGNER THE PROBLEM WITH THE COMPANY’S VISION • In the case with Barrick the vision is “to be the world’s best gold mining company by operating in a safe, profitable and responsible manner.” • The mission sounds very similar to the vision: “to be the world’s best gold company by finding, developing and producing quality reserves in a profitable and socially responsible manner.” • The mission is meaningless as it basically says that “we are the mining company.”
  15. 15. BSC DESIGNER THE PROBLEM WITH THE COMPANY’S VISION • There is the same problem with the vision.
  16. 16. BSC DESIGNER THE PROBLEM WITH THE COMPANY’S VISION • There is the same problem with the vision. • It is another platitude that is telling people that the company is going to be “the best,” “the biggest,” or “the most successful.”
  17. 17. BSC DESIGNER THE PROBLEM WITH THE COMPANY’S VISION • I believe they would have much better results if executives of the company would answer the question: “What is the company going to be in 5 or 10 years?”
  18. 18. COMPENSATION PLAN IS ALIGNED WITH SHAREHOLDERS INTEREST ONLY
  19. 19. BSC DESIGNER COMPENSATION PLAN IS ALIGNED WITH SHAREHOLDERS INTEREST ONLY • Their intention with the introduction of the compensation scorecard was to “align compensation practices with the long-term interests of shareholders.”
  20. 20. BSC DESIGNER COMPENSATION PLAN IS ALIGNED WITH SHAREHOLDERS INTEREST ONLY • Their intention with the introduction of the compensation scorecard was to “align compensation practices with the long-term interests of shareholders.” • The new scorecard is planned to be transparent
  21. 21. BSC DESIGNER COMPENSATION PLAN IS ALIGNED WITH SHAREHOLDERS INTEREST ONLY • Their intention with the introduction of the compensation scorecard was to “align compensation practices with the long-term interests of shareholders.” • The new scorecard is planned to be transparent • In the sense that it will be announced to the stake holders in advance and the results will be published in the end of each year.
  22. 22. BSC DESIGNER COMPENSATION PLAN IS ALIGNED WITH SHAREHOLDERS INTEREST ONLY • Among the performance indicators the company has on the compensation scorecard:
  23. 23. BSC DESIGNER COMPENSATION PLAN IS ALIGNED WITH SHAREHOLDERS INTEREST ONLY • Invested capital
  24. 24. BSC DESIGNER COMPENSATION PLAN IS ALIGNED WITH SHAREHOLDERS INTEREST ONLY • Invested capital • Dividends to shareholders
  25. 25. BSC DESIGNER COMPENSATION PLAN IS ALIGNED WITH SHAREHOLDERS INTEREST ONLY • Invested capital • Dividends to shareholders • Capital project performance
  26. 26. BSC DESIGNER COMPENSATION PLAN IS ALIGNED WITH SHAREHOLDERS INTEREST ONLY • Invested capital • Dividends to shareholders • Capital project performance • Free cash flow
  27. 27. SHAREHOLDER INTEREST IS THE ACTUAL MAIN GOAL OF THE COMPANY
  28. 28. BSC DESIGNER SHAREHOLDER INTEREST IS THE ACTUAL MAIN GOAL OF THE COMPANY • It appears that the new scorecard with the focus on shareholder value has nothing to do with the vision of the company
  29. 29. BSC DESIGNER SHAREHOLDER INTEREST IS THE ACTUAL MAIN GOAL OF THE COMPANY • It appears that the new scorecard with the focus on shareholder value has nothing to do with the vision of the company • “to be the world’s best gold mining company by operating in a safe, profitable and responsible manner”
  30. 30. BSC DESIGNER SHAREHOLDER INTEREST IS THE ACTUAL MAIN GOAL OF THE COMPANY • It appears that the new scorecard with the focus on shareholder value has nothing to do with the vision of the company • “to be the world’s best gold mining company by operating in a safe, profitable and responsible manner” • According to the compensation scorecard, the vision of the company is supposed to be something like this, “Do all the best to pay high dividends.”
  31. 31. BSC DESIGNER SHAREHOLDER INTEREST IS THE ACTUAL MAIN GOAL OF THE COMPANY • The company is in the mining business and the compensation scorecard seems to have nothing to do with mining gold.
  32. 32. BSC DESIGNER SHAREHOLDER INTEREST IS THE ACTUAL MAIN GOAL OF THE COMPANY • The company is in the mining business and the compensation scorecard seems to have nothing to do with mining gold. • In this sense this scorecard represents a very short-term strategy that treats shareholders like the main clients and ignores the real purpose of the company.
  33. 33. PAYING THE COMPENSATION. EXECUTIVES WON’T SEE CASH FOR A LONG TIME
  34. 34. BSC DESIGNER PAYING THE COMPENSATION. EXECUTIVES WON’T SEE CASH FOR A LONG TIME • Still, there are some good ideas about the compensation program:
  35. 35. BSC DESIGNER PAYING THE COMPENSATION. EXECUTIVES WON’T SEE CASH FOR A LONG TIME • Only smaller part of the compensation will be paid in the form of an annual bonus;
  36. 36. BSC DESIGNER PAYING THE COMPENSATION. EXECUTIVES WON’T SEE CASH FOR A LONG TIME • Only smaller part of the compensation will be paid in the form of an annual bonus; • The main part will be awarded with company’s shares that cannot be sold until executive leaves the company.
  37. 37. THE CONNECTION BETWEEN THE VISION AND THE COMPENSATION SCORECARD IS BROKEN
  38. 38. BSC DESIGNER THE CONNECTION BETWEEN THE VISION AND THE COMPENSATION SCORECARD IS BROKEN • Vision, mission, company’s strategy, and the business scorecard are interconnected.
  39. 39. BSC DESIGNER THE CONNECTION BETWEEN THE VISION AND THE COMPENSATION SCORECARD IS BROKEN • Vision, mission, company’s strategy, and the business scorecard are interconnected. • They should be oriented in the same direction and support the coherent strategy of the company.
  40. 40. BSC DESIGNER THE CONNECTION BETWEEN THE VISION AND THE COMPENSATION SCORECARD IS BROKEN • Vision, mission, company’s strategy, and the business scorecard are interconnected. • They should be oriented in the same direction and support the coherent strategy of the company. • The company focused too much on shareholder’s value, forgetting about the customer’s value and the core business competencies.
  41. 41. CONCLUSION
  42. 42. BSC DESIGNER CONCLUSION • I don’t think that the suggested scorecard can do any harm to the company’s business
  43. 43. BSC DESIGNER CONCLUSION • I don’t think that the suggested scorecard can do any harm to the company’s business • The approach is very myopic and the promoted transparency of the compensation plans is very questionable.
  44. 44. BSC DESIGNER MORE ABOUT THE BALANCED SCORECARD Find more insightful articles about the Balanced Scorecard in ”Articles” section at www.bscdesigner.com BSC DESIGNER
  45. 45. BSC DESIGNER THANK YOU! Feel free to send us your questions using the contact form at www.bscdesigner.com

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