Note by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
The purpose of this article is to examine how different performance measures were weighted in a subjective balanced scorecard bonus plan. The authors use theory from economics and psychology to develop and test various hypotheses related to this issue. These hypotheses and test results are summarized in the table below adapted from the authors' Tables 1 & 8. The findings are based on a multiyear field study of a balanced scorecard bonus plan used in Global Financial Services (GFS), a leading international retail banking services provider. They found that subjectivity in the bonus plan allowed supervisors to include factors that were not in the scorecard, ignore measures that were in the scorecard and change the evaluation criteria from period to period. This led to complaints about favoritism in bonus awards and the balanced scorecard was eventually abandoned.
|Hypotheses & Test Results regarding
Weights Placed on Different Types of Performance Measures*
|Economics-Based Hypotheses||Nonfinancial measures that are more predictive of financial results > Nonfinancial measures that are less predictive||Not consistent|
|Objective measures > Subjective measures||Consistent for financial and customer measures; not consistent for strategy measures|
|Psychology-Based Hypotheses||Outcome/results measures > Input/driver measures||Consistent for financial measures; not consistent for strategy measures|
|External measures > Internal measures||Consistent for financial and customer measures; not consistent for strategy measures|
|Financial measures >/< Nonfinancial measures||Greater weight on financial measures|
|Objective/Quantitative measures > Subjective/Qualitative measures||Consistent for financial and customer measures; not consistent for strategy measures|
|Measures based on multiple indicators > Single-item measures||Consistent for financial and customer measures; not consistent for strategy measures|
|Measures with targets > Measures without targets||Consistent|
|A > B: Weight on measure A is greater than the weight on measure B.
A >/< B: Weight on measure A has an ambiguous magnitude relative to the weight for measure B.
* Adapted from Tables 1 & 8, pp. 733 and 750.
Ittner, C. D. and D. F. Larcker. 1998. Innovations in performance measurement: Trends and research implications. Journal of Management Accounting Research (10): 205-238. (Summary).
Ittner, C. D. and D. F. Larcker. 2003. Coming up short on nonfinancial performance measurement. Harvard Business Review (November): 88-95. (Summary).
Kaplan, R. S. and D. P. Norton. 1992. The balanced scorecard - Measures that drive performance. Harvard Business Review (January/February): 71-79. (Summary).
Kaplan, R. S. and D. P. Norton. 1996. Using the balanced scorecard as a strategic management system. Harvard Business Review (January-February): 75-85. (Summary).
Martin, J. R. Not dated. Balanced scorecard concepts. Management And Accounting Web. (Summary).
Norreklit, H. 2003. The balanced scorecard: What is the score? A rhetorical analysis of the balanced scorecard. Accounting, Organizations and Society 28(6): 591-619. (Summary).
Schonberger, R. J. 2008. Lean performance management (Metrics don't add up). Cost Management (January/February): 5-10. (Note: Schonberger criticizes the KPI or scorecard approach from the lean enterprise perspective. Summary).