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Balanced Performance Measurement

by William Laurent, William Laurent, Inc.Thursday, November 25, 2010

In the not so distant past, the performance of a Chief Executive Officer and their senior management was judged primarily by the rise or decline of the company’s share price over a medium to long-term time horizon. But times were simpler then. In today’s market high frequency trading, hostile takeovers, green compliance on a global scale and hyper cross-media branding have rendered obsolete the near exclusive reliance on share price as the dominant Key Performance Indicator (KPI) for elite executives. In our present time, a corporation can lose tens of millions of dollars a year while experiencing a steep decline in their share price, and yet the CEO and his/her directors may reap record bonuses and salaries, or be rewarded lucrative golden parachute packages as they bail out of a sinking ship. Compensation committees and corporate governance committees usually come to the rescue of senior executives by trotting out various statistics and KPI (many times highly subjective and contorted) that show acceptable performance on the part of management, thereby justifying hefty payouts from the company coffers.

As a shareholder of quite a few business entities, I find myself reading a number of annual reports. Of particular interest are the sections that expound on and rationalize executive compensation. The reality is that the methodology used to determine executive remunerations varies from company to company. While many compensation boards have introduced clear indicators of what constitutes minimal performance, there seems to be no discernible limit on how superior performance is delineated.

After the fall of Lehman Brothers in 2008 and the advent of TARP (Troubled Asset Relief Plan) to purchase assets and equity from troubled financial institutions, the imperative for more congruous KPIs in the finance sector was codified. For many organizations that took TARP monies, restrictions were enacted on bonus payouts for senior executives, namely the CEO and the next 20 most highly compensated employees. A lesser known detail of TARP is that it contained several claw-back provisions which had the authority to nullify bonus payments if ineffectual performance metrics were found to have factored in the calculation of a bonus. Although this legislation only affects financial organizations as of now, a precedent may have been set for U.S. businesses that receive government bailouts in the future. As regulatory pressures increase under the Obama administration, it would not be surprising to see a body of standard “government endorsed” KPIs emerge. These KPI would be wielded by the government as a tool to limit the amount of monies senior executives could receive if their companies are in desperate financial straits. With recessionary forces continuing to cast their shadow over the global economy, another high profile bailout in the near future seems inevitable. Performance management dashboards and quality management BI will become even more important.

When it comes to measuring executive performance, old formulistic approaches to KPIs are increasingly being shed for more a more balanced approach that looks at value creation, innovation, and attainment of strategic goals from both a bottom-down and top-up perspective. The balanced scorecard (BSC) methodology provides a structured performance measurement and reporting paradigm that is both highly actionable and holistic in scope; it improves accountability, fosters collaboration, and provides transparency.  The BSC approach attempts to reflect a deeper understanding of company core values and operational health, and to clearly define and better refine leadership practices.

Many senior leaders distrust a balanced scorecard approach because it does not focus solely on empirical financials, but takes into account a host of more subjective variables such as customer satisfaction levels. With BSC, there is a heavy emphasis on understanding how relationships are managed throughout the enterprise.  BSC recognizes the complexity an executive’s contribution in a global business entity, as opposed to a myopic concentration on a few core responsibilities of the executive. Today it is not enough for executive management to simply meet generic targets because they will wind up being just another “KPI slave”— riveting their time and attention to the tasks that they will be judged on, while neglecting other duties that may be of equal or greater importance. This KPI slave syndrome can have an enormous negative impact on business agility.

Performance measurement at the senior management level should be used as more than a yardstick to determine bonus and salary payouts: performance measurement should also be used to help develop leaders.  With balanced performance management tools and KPIs in place, inter-departmental communication and trust can be built unilaterally while business agility ramps up. When a company’s board sets the strategic goals and long-term corporate road map, they often assume their goals and values are shared by senior management. However, this is never completely the case: goal setting is not goal sharing. In order to make sure that mutual interests are completely aligned and that potential conflicts of interest are indentified (and eliminated) at an early stage, a balanced set of KPIs for senior management will need to be articulated by the most senior board members and promulgated out to all interested and relevant parties on a yearly basis.

About the Author

William Laurent is one of the world's leading experts in information strategy and governance. For 20 years, he has advised numerous businesses and governments on technology strategy, performance management, and best practices—across all market sectors. William currently runs an independent consulting company that bears his name. In addition, he frequently teaches classes, publishes books and magazine articles, and lectures on various technology and business topics worldwide. As Senior Contributing Author for Dashboard Insight, he would enjoy your comments at wlaurent@williamlaurent.com

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