Performance Measures and Compensation

Memorandum

TO: EEC President

FROM: Lela Keel, EEC Financial Analyst

DATE: February 05, 2011

SUBJECT: Performance Measures and Compensation

Introduction

The President of Eddison Electronics Company (EEC) has decided to adopt the balanced scorecard after reviewing the presentation that was presented to him by me on the utilization of the system and how it could improve the overall company. As remembered these performance measures related to the company which are evaluated with the balanced scorecard will fall into four groups, which are the financial perspective, the customer perspective, the internal business processes, and the innovative and learning perspective. The President of EEC has asked me to provide a memo to identify how the company would tie the four performance measure groups of the balanced scorecard to compensation. He would also like me to respond to the question of how immoral behavior can result if the company uses the wrong performance measures to tie compensation to the performance measures of the balanced scorecard. Also to be discussed will be how the company can go about avoiding immoral behaviors regarding the balanced scorecard performance measures.

Performance Measures

Some performance indicators that the company should seek to measure in order to improve performance and directly tie compensation systems to include customer satisfaction, quality of service, costs of products, and satisfaction among employees. The balanced scorecard is an ideal tool for the company to use in order to tie some form of compensation system to performance since it will openly communicate the expectations of each department without losing focus on the actual function each department plays in pursuing the strategy and success of the company. However, the possibility of every employee completely committing to the objectives of the company and maintaining a focus on their job assignments within the company will rely heavily on their understanding of the importance of enhancing the performance of the operational activities of the business, as well as the incentives involved for them in setting out and making continuous improvements that the company needs to be successful (Atkinson, Kaplan, & Young, 2007).

Immoral Behavior

The company must ensure that fairness is given to every employee when developing a compensation system. Making certain that the compensation system is reasonable for every employee of the company will alleviate the possibility of immoral behavior being revealed. If the compensation arrangement does not seem to be reasonably fair to the employees they may pursue their own objectives for the company and reject the company’s objectives all together. In this sense, some employees might choose to go with their personal interests for the company and try to uncover in the compensation package so that they can utilize the system to benefit themselves with no regard for what is best for the company. For example, if we were to present a bonus arrangement that was set out to increase sales for the company in which the employees must meet a certain sales quota for the month, and the employees who are offered this bonus arrangement have the same amount of customers that they have to contact from month to month. However, the employees that met or exceeded their sales quotas would be permitted to receive some of the bonus collection. The immoral behavior in this situation would be if some of the employees were constantly lagging behind on their sales quotas for the month, but just because they met their sale expectations for the month they are permitted to get a fraction of the bonus merely because the employees who are lagging behind did met their sales quota. What would make this fair to every employee would be to offer certain incentives to ensure that every employee meets their sales quota for the month, and offer additional incentives to the employees who exceed their sales quotas for the month. For instance, if possible, a $250 incentive could be offered to the employees who meet their sales quotas for the month, and an additional 10% of total sales could be added to the employees who exceed their sales quotas for the month. By having this type of incentive programs in place for the employees we can make sure that the objectives of the company are being met or exceeded, and an additional motivator for the employees can be added (Sims, 1992).

Reducing the company’s manufacturing costs is of great importance to management since when the company’s costs are reduced we see an increase in profits. However, reducing the costs associated with the products we manufacture should not be done at the expense of decreasing the quality of our products. This brings about another type of immoral behavior that might take place regarding upper management within the company. Manual labor costs is perhaps one of the biggest expenses for the company, and if an incentive arrangement were put into place for managers to persuade them to reduce labor costs for the purpose of increasing our total operating net income it would be simple for managers to start letting workers go. The dilemma here would be the company would not have enough employees to produce our products and our customers would suffer, as well as our product quality. Furthermore, the employees who were not let go would also suffer since they would be expected to produce the same amount of work with less help than before. To a certain degree, this type of incentive arrangement would be ideal for the managers of the company, but overall it would be immoral for the company, particularly because the company would suffer from bigger financial problems in the long run (Sims, 1992).

Choosing Performance Measurements

EEC may choose to implement one measure to determine how we are doing on performance. However, there is a dilemma with this in that it might persuade the employee’s to just attempt to obtain enough money for the company as we need to survive, and they will give no thoughts at all to the real value of the company. Therefore, implementing a second measure of performance is recommended for the company. If a second performance measure is added we can significantly improve production of our products and improve the quality of our products and, in addition, customer service would be improved by not having to halt on manufacturing the products for our customers which will ensure that their need are being met by us. If the company implements performance measures to increase production and satisfy our customers the result would be us being viewed more optimistically and the improvements in the areas that are being measured would be completely enhanced in which management would benefit greatly. Unfortunately, having numerous performance measure in place for which workers must keep focus on can become a burden and this can reduce the changes that the company’s goals are achieved (Balanced Scorecard, 2011).

Tying Performance to Compensation

Tying some type of compensation system which measures performance accurately is a given, but if we put the compensation system together in such a way that encouragement is given to every employee of EEC in working intensely to encounter the objectives of the company then everyone will benefit. With that being said, adding a compensation package that factors in the company’s success and our employee’s success would benefit our customer’s, employees, and the company. For instance, stock options could be offered to our employees, in addition to bonuses to motivate them. One instance would be to offer bonuses to every employee if the company’s total profits rise above a level that would be determined by top managers throughout the year, or even month. This kind of encouragement plan might persuade the employees of the company to continue being employed with us which in turn will save the company money on recruiting and training new employees. This could motivate the employees to put more effort forward in working for us and strive to attain the company objectives since they would be getting something in return (Balanced Scorecard, 2011).

Avoiding Immoral Behavior

Immoral behavior can be eliminated before it takes place by demonstrating good leadership. The manager of the company need to be imaginative in creating an environment where employees will not want to behave immorally due to the fact that they do not want to ruin the good thing they have in working for the company. The culture of the company should be built from values that are shared by the company and the employees. The managers should let the employees know that they appreciate their work and immoral behavior will not be tolerated by anyone. Once this is done the employees will know that their work is valued by the company and the tone should be set for them in how they interact with each other. Managers should also be promoting ethical behavior for every employee by persuading them and showing them the right way to do things. This would also eliminate the misusing of any compensation arrangement in place to improve the operations of the company. Having this type of environment set up in the company will allow the mangers to recognize immoral behavior demonstrated by employees before more problems arise. Also, any compensation arrangement set forth will have a better change at being successful if the company promotes and encourages ethical behavior by every employee (MacLellan, 2007).

Conclusion

When using the balanced scorecard to form a compensation arrangement it must be linked with the performance strategies of the company to ensure it is successful. In order to reflect on this success, the company and our employees must attempt to acquire the strategies and objectives of the company no matter what the improvement areas may be. Also, the performance areas that need to be measured have got to be quantifiable for them to be concluded as to whether things need to be improved or whether they are already improving. One way customer service can be measured is with a rise in delivered products or the return amount of products. The internal process perspective can be measured by the total products produced or the hourly total required to produce a specific amount of products, such as the new computer memory chip. The financial perspective can be regularly measured by what has already taken place in relation to the operations of the company, and it can also be used to make adjustments for the upcoming evaluation period of the company. In addition, it must be remembered with all these perspectives that when the company implements any type of compensation arrangement, the arrangement must be reasonable to every employee to make sure that immoral behavior does not become an issue (Balanced Scorecard, 2011).

References

Atkinson, A., Kaplan, R., Matsumura, E., & Young, S. (2007). Management accounting. (5th ed.). Upper Saddle River, NJ: Pearson-Prentice Hall.

Balanced Scorecard. (2011). Retrieved from http://www.12manage.com/methods_balancedscorecard.html

MacLellan, B. (2007). The balanced scorecard: Developing, measuring, and communicating organizational strategy. Retrieved from http://www.chco.ca/reports/files/balancedscorecard.pdf

Sims, R. (1992). Journal of Business Ethics. The challenge of ethical behavior in organizations. Retrieved from http://construct.haifa.ac.il/~danielp/soc/sims.htm


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