Question

Write a brief one-page summary describing the use and importance of the balanced scorecard in executive compensation plans.

Answer 1

The balanced scorecard is a approach which helps the employees of the company to execute and the implement the organization's strategy.A balanced scorecard has four perspectives i.e. financial, internal business processes, customer satisfaction, learning and growth. Performance indicators like customer satisfaction, quality and cost are measures which all organizations often use to tie compensation plans to performance improvement.

In most organizations, the performance portion of the salary/wage is depends on certain criteria. These criterias are derived from the balanced scorecard approach. It is a demanding remuneration system, however it ensures utmost tranparency. A balanced scorecard clearly communicates departmental expecatations in line with the overall strategy of the company.

The simplest method of tying the employee compensation to a balanced scorecard approach is by ensuring that a certain percentage of incentive compensation is given to the employees only when the organization achieves certain goals. All criterias should be assigned certain weights to calculate the final compensation payout.

For example, if the company achieves its return on equity target , a certain portion of the compensation shall be released.