Performance Measurement
PERFORMANCE, COMPENSATION, AND THE BALANCED SCORECARD*
Christopher D. Ittner, David F. Larcker, and Marshall W. Meyer The Wharton School The University of Pennsylvania November 1, 1997
*This research was funded by the Citicorp Behavioral Sciences Research Council, whose support is gratefully acknowledged.
© 1997, Christopher D. Ittner, David F. Larcker, and Marshall W. Meyer
PERFORMANCE, COMPENSATION, AND THE BALANCED SCORECARD
A growing number of firms are replacing their financially-based performance measurement and compensation systems with a "balanced scorecard" incorporating multiple financial and nonfinancial indicators. Proponents of the balanced scorecard concept contend that this approach provides a powerful means for translating a firm's vision and strategy into a tool that effectively communicates strategic intent and motivates performance against established strategic goals (Kaplan and Norton, 1996). However, the balanced scorecard literature provides little discussion of the scorecard's role in compensation decisions, despite the fact that the majority of adopters use the scorecard for this purpose (Towers Perrin, 1996). The limited discussion of performance evaluation and compensation issues raises a number of questions regarding how the multiple performance measures and their relative weights are chosen to ensure "balance" in the compensation plan, the appropriate role of subjective versus formula-driven performance evaluations, the choice of qualitative versus quantitative performance measures, and the extent to which managers' understanding of strategic objectives and managerial actions vary with different forms of scorecard-based incentive plans. These questions are all the more interesting because, in the past, firms have sought to simplify performance measures by adopting multiunit organizational designs, decentralizing operational decisions to individual business units, and holding business units accountable mainly for bottom-line
Christopher D. Ittner, David F. Larcker, and Marshall W. Meyer The Wharton School The University of Pennsylvania November 1, 1997
*This research was funded by the Citicorp Behavioral Sciences Research Council, whose support is gratefully acknowledged.
© 1997, Christopher D. Ittner, David F. Larcker, and Marshall W. Meyer
PERFORMANCE, COMPENSATION, AND THE BALANCED SCORECARD
A growing number of firms are replacing their financially-based performance measurement and compensation systems with a "balanced scorecard" incorporating multiple financial and nonfinancial indicators. Proponents of the balanced scorecard concept contend that this approach provides a powerful means for translating a firm's vision and strategy into a tool that effectively communicates strategic intent and motivates performance against established strategic goals (Kaplan and Norton, 1996). However, the balanced scorecard literature provides little discussion of the scorecard's role in compensation decisions, despite the fact that the majority of adopters use the scorecard for this purpose (Towers Perrin, 1996). The limited discussion of performance evaluation and compensation issues raises a number of questions regarding how the multiple performance measures and their relative weights are chosen to ensure "balance" in the compensation plan, the appropriate role of subjective versus formula-driven performance evaluations, the choice of qualitative versus quantitative performance measures, and the extent to which managers' understanding of strategic objectives and managerial actions vary with different forms of scorecard-based incentive plans. These questions are all the more interesting because, in the past, firms have sought to simplify performance measures by adopting multiunit organizational designs, decentralizing operational decisions to individual business units, and holding business units accountable mainly for bottom-line