(Compensation tied to balanced scorecard) Degree of difficulty of target achievement in the mid-1990s mobile corporation's marketing and refining (M&R) division underwent a major reorganization and developed new strategic directions. In conjunction with these changes, M&R developed a balance scorecard around four perspectives: financial customer, internal business processes and learning and growth. Subsequently M&R linked compensation to its balanced scorecard metrics. To illustrate, all salaried employees in M&R's Natural Business Units received the following percentages of their competitive market salary:
Poor Performance within industry Average performance within industry Performance best in industry
- Base Pay 90% 90% 90%
- Award Based on corporate 1-2% 3-6% 10%
- performance on financial metrics
- Award based on performance on 0% 5-8% 20%
- balanced scorecard metrics for the
- M&R division and business unit 91-92% 98-104% 120%
The balanced scorecards included numerous metrics. M&R's financial metrics included return on capital employed and profitability and customer metrics included share of targeted segments of consumers and profitability of dealers. Internal business process metrics included safety and quality indices. Finally learning and growth metrics included an index of employees perceptions of the work climate at M&R
Business units developed their own Balanced Scorecards. In addition to choosing targets from scorecard metrics, the business units chose percentage weights that determined how much the achieved scorecard measures would contribute to the bonus pool displayed in the taable above. These percentage weights were required to sum to 100%. Furthermore, in connection with the award fro performance on the business unit Balanced Scorecard metrics, the business units assigned a performance factor, that is, a "degree of difficulty" of target a chievement for each target. The performance factors are similar in concept to those in diving or gymnastic competitions where performance scores depend on the difficulty of the attempted dive or gymnastic routine. The performance factors underwnt revieqw by peers, uppoer management, and the employees whose evaluation and compensation depended on the performance factors. ranged from 1.25 (for best-in-industry performance) to 0.7 for poor performance. A target corresponding to average industry performance rated a 1.0 performance factor.
Required:
A. What are the advantages and concerns in linking compensation to a balanced scorecard generally?
B. Evaluate M&Rs approach to linking compensation to multiple measures including its system of assigning degrees of difficulty to achieving targets. In your response, consider the process that is involved in developing the compensation scheme.