The document discusses performance measurement and management. It describes the balanced scorecard approach which takes a balanced view of value creation by focusing on financial, customer, internal process and learning/growth perspectives. It also discusses using a combination of objective and subjective measures to evaluate performance, as no single measure can fully reflect performance. Subjectivity in incentives may be used when targets are difficult to achieve or quantify, or when there are interdependencies between departments. Organizational architecture must balance decision rights, performance evaluation and compensation structures to properly incentivize employees.

1. Balanced Scorecard and it’s relation to organisational design, strategy implementation and criteria for selection of performance measuresBusiness performance measurement

2. Before we start…Lacking congruence (alignment of interest) in incentive systems btw leader and shareholder can lead to financial crisis 3Organisational ArchitectureDecision making authority, performance evaluation and compensation stucture must be aligned for the three-legged stool not to tilt10Performance MeasurementThere three general types of measures: Market based, accounting based and the combination of the two – BSC is an example19Subjectivity in IncentivesSubjectivity in Incentives refers to how the performance is evaluated but also to the incentive itself. Is used if targets are stretched30Balanced ScorecardBSC takes a balanced approach to value creation, BPM and linkages to strategy by focusing on finance, customers, process and learning36SummaryWhat gets measured gets done – so think carefully about what you measure and how you measure it44

3. Before We Start…

4. Before We Start...Anyone brought a laptop for taking notes?

5. and do you have a twitter account?Before We Start…

6. .. I need three volunteers?Before We Start…

7. Tweet key learnings… Before We Start…MCF10Control10Password:

8. What we can learn from a financial crisis and YoutubeIncentives and not measuring what is important can be devastating on world economicsBefore We Start…http://www.youtube.com/watch?v=UC31Oudc5Bg

9. Tweet key learning….Lacking congruence (alignment of interest) in incentive systems btw leader and shareholder can lead to financial crisis #MCF10Before We Start…@MCF10

10. Organisational Architecture

11. Organisational ArchitectureZimmerman et. al ch. 4

12. To guide internal transactions the three legged stool must balanceOrganisational ArchitectureZimmerman et. al ch. 4In markets this is self-regulating – in companies this is done by expansive administration

13. All organisations must constructA system that assigns decision rightsA system that measures performanceA system that rewards and punishes performance

14. Decision controlDecision making authority (hiearchies) – Seperatedesision management and controlOrganisational ArchitectureZimmerman et al ch. 4AgentPrincipalDecision management1. Initiation2. RatificationFormulating and choosing between decisionsApproval of selected decision with possible modifications3. Implementation4. MonitoringExecuting the selected decisionsEvaluating the outcome and rewarding decision makers

15. Performance evaluation – Direct attention and give feedback…Necessary in order to provide feedback and to objectively score performance

16. An unbalanced use of objective and subjective measures can lead to over-focus of employees on either the objective or subjetive

17. Greater reliance on incentive compensation requires a higher quality of the measures for evaluationOrganisational Architecture

18. A balanced mix of objective and subjective measures…Objective Measures… Explicit

19. Verifiable measure

20. Quantifiable

21. Examples

22. Sales

23. ProductionSubjective Measures…Implicit

24. Hard-to-measure

25. Qualitative

26. It is used because many jobs have multiple dimensions

27. Examples

28. Team spiritOrganisational ArchitectureZimmerman et al. CH. 4

29. Compensation Structure…Must be large enough to make a difference (min. 5% of salary)

30. Must be realistic to obtain and ambitious to ensure performance pressure

31. Employees often need a ”sufficient” base salary – the bonus is uncertain and is not 100% influenced by the individuals actions

32. Often there is lower boundary and upper-bound

33. Must align with strategyOrganisational Architecture

35. When the legs don’t balance (kassetækning)…Organisational ArchitectureZimmerman et al ch. 4

36. Performance Measurement

37. Criteria for evaluating performance measuresPerformance MearsurementMerchant, 2006

38. Three general measurement alternatives…Performance MeasurementMerchant, 2006

39. Market Based Measures…Performance MeasurementMerchant, 2006Pay managers the same way shareholders are paid

40. Measures are based on changes in Market Value or returns to the shareholders

41. Market measures reflect expectations for future cash flows e.g. Kodak CaseMarket Based Measures…Pro’sStrong alignment with shareholders (Congruence)

42. Available on a daily basis (timely)

43. Precise and objective (Accurate)

44. Easy to understand

45. Cost effectiveCon’sOnly available for publicly traded companies

46. Limited influence for ordinary employees (controlable)

47. Causility: 98% of stock price changes can in some markets be explained by macroeconomic factors

48. Short term problems with congruence – Risk of management MyopiaPerformance MeasurementMerchant, 2006

49. Accounting Based Measures…Performance MeasurementMerchant, 2006Residual Measures: Net Income, EBITDA etc.

50. Ratio Measures: Return on Investement (ROI) etc.

51. Are better at explaining value creation over a longer time period (e.g. 10 years)

52. To improve congruence different propriatary models have been developed e.g. EVAAccounting Based Measures…Pro’sAvailable Monthly, Quarterly and Yearly (Timely)

53. Measurement system already in place by law (Cost effective)

54. Relatively precise and objective as it is audited (Accurate)

55. Can be tailored to match authority limits of manager (Controllable)

56. Measures often well understood (Understandable)Con’sPast performance

57. Transaction oriented

58. Dependant on measuring method(accurate, congruence)

59. Ignore cost of equity capital risk (congruence), risk and capital structure affects the future value

60. Ignores changes in risk, but when the risk of future cashflow is decreased – economic value is created

61. Conservative, disregard hard to value intangible assets (accurate)Performance MeasurementMerchant, 2006

62. Combination of Measures…Performance MeasurementMerchant, 2006No single measure can reflect performance well enough to motivate optimal decision making

63. Balanced Scorecard etc

64. ”KISS” example (Jeff Immelt, GE)

65. 50% bonus dependant on operating cashflows over a three year period

66. 50% of bonus dependant on shareholder return for over three year period meeting or beating S&P500Pro’s and con’s of in the combination of measures…Pro’sFlexible

67. Canbe future oriented

68. Causuallinkages in the BalancedScorecardsstrategymapprovideguidance. A cause and effectrelationship.(controllable)

69. Potentially it canensurecongruenceCon’sDifficult to test whethermeasuresreflectchange in valueTheyarebuildonuntestedhypothesesonvaluecreation in the given company

70. Canbeveryexpensive to implement and measure, due to a high no. of complexmeasure points

71. Method for measuringcanaffectresults (customersatisfaction)

72. Valuable information canbe lost in aggregation due to weighing problems

73. Difficult to determinewhat is optimal (S-curve / Net promoter Score)Performance Measurement

74. General Advice…It needs to be ambitions (red), pushing people out of their comfort zone

75. Be realistic in order to for people to believe that it is possible to get their bonus

76. In budgetting – people tend to be conservative about own future performancePerformance Measurement

77. What Gets Measured Gets Done…What is important...Is it motivating, attractive, important and inspiring goal?

78. Can the measure reflect a strategic intent?

79. Sears example:

80. Compelling place to work

81. Compelling place to shop

82. Compelling place to investMotivational theory…Motivational theorists such as Locke & Latham found that:

83. Goal specificity

84. Goal difficulty

85. Goal CommitmentHad an effect on task performancePerformance Measurement

86. Dilemma in performance measurement…Performance MeasurementBenchmarkingContinous Development

87. Performance Measurement

88. Subjectivty in Incentives

89. Subjective in IncentivesGibbs et. al, 2004Two meanings of subjectivity in incentives…1. Meaning: The basis for which the incentive is given is measured subjectivelySubjectivity in Incentives..2. Meaning: The incentive itself is subjective e.g. Promotion, job assignment or threat of termination

90. Subjectivity can arise in several ways…All or part of a bonus is based on subjective judgements about performance

91. The weights on quantitative measures are determined subjectively

92. A subjective performance threshold is used, meaning whether to pay a bonus is determined on measured performance and other factors

93. Subjective bonuses are also refered to as discretionary bonusesSubjectivity in IncentivesGibbs et al, 2004

94. Subjectivity is used when…Subjectivity in IncentivesGibbs et al, 2004When there has been significant investment in trainingWhen there are departemental interdependenciesSubjectivity is used..When objective / quantitative bonuses are difficult to achieve and where there is significant consequence of not achieving them

95. The study failed to prove that following was determinants in usage of subjectivity…Subjectivity in IncentivesGibbs et al, 2004

96. The Effect…Subjectivity in IncentivesGibbs et al., 2004

97. Balanced Scorecard

98. Traditional financial measures are focused on historic performance and tangible assetsBalanced Scorecard

99. Strategy understanding and implementation is a challangeBalanced ScorecardGary HamelVisionManagement systemsLess than 5% of the employees understands the strategyIn more than 60% of companies the budgets are NOT derived from the strategyCompensationLeadershipLess than 25% of managers are rewarded based on the strategyMore than 85% of managers use LESS than an hour a month to talk about the strategy

100. What is a balanced scorecard…Balanced ScorecardA tool to balance value-creating activities towards shareholder value, as well as ensure strategy implementation and performance measurement

101. Balanced ScorecardKaplan & Norton, 2001Financial PerspectiveIf we succeed how will we look to our shareholdersLearning and GrowthCustomer PerspectiveVision & StrategyTo achieve my vision, how must my organisation learn and ImproveTo achieve my vision how must look to my customersProcess PerspectiveTo satisfy my customers at which processes must I excel

102. Balanced Scorecard

103. The 5 Principles of the Balanced ScorecardBalanced Scorecard

104. Reflections…EffectsImplementing a balanced value creating strategy and aligning organisational activities

105. Provide transparency - ”Seeing” what is going on in the organisation

106. Provide horizontal integration - Numbers initiate debate across functional borders = verbalisation of local knowledge

107. Provide conflict - Surfacing of local knowledge leads to conflict => realignment of organisational power structuresProblemsAssumes that strategy is planned – lack contingency

108. Assumes that structure follows strategy

109. Top-down communication – interactivity at top-management level

110. These issues are naturally adressed in the continous development of the revision of the Balanced Scorecard – but provides difficulty in making benchmarksBalanced Scorecard

111. Causal Linkages and concrete objectives, measures, targets and initiativesBalanced ScorecardKaplan & Norton, 2001

112. Summary

113. Performance MeasurementEvaluation Criteria:Congruence

114. Controllable

115. Timely

116. Accurate

117. Understandable

118. Cost EffectiveSummary

119. Organisational ArchitectureGeneral Concepts Self-Interest

120. Decision Rights and Systems

121. Knowledge and decision making

122. Markets vs. Firms

123. Influence Cost

124. Cost EffectiveSummary

125. Subjectivity in measures used to…To counter that quantitative bonuses has incomplete coverage of the work carried out

126. To ensure a long-term focus

127. To counter manipulability of quantitative bonuses

128. To filter out ”noise” from the performance from other departments

129. To recalibrate incentives in situations where ambitious quantitative performance targets are not met

130. Where departments operates in a ”loss” situationSummary

131. Balanced ScorecardA tool to balance value-creating activities towards shareholder value, as well as ensure strategy implementation and performance measurementSummary