Integration Model of Personal Balanced Scorecard and Contribution-Related Pay for Supporting Incentive-Based Payment

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1 Available at Conference Proceedings 0 ISBN: The rd International Conference on Technology and Operations Management Sustaining Competitiveness through Green Technology Management Bandung Indonesia, July 4-6, 0 Integration Model of Personal Balanced Scorecard and Contribution-Related Pay for Supporting Incentive-Based Payment Rosita Meitha,* Industrial Engineering Department - University of Surabaya (Ubaya), Jl. Raya Kalirungkut, Surabaya 609, Indonesia Abstract. Balanced Scorecard (BSC) is a strategic performance management tool consists of a set of measure that gives top managers a fast but comprehensive view of the business. BSC includes financial measures that tell the results of actions already taken, complements the financial measures with operational measures on customer satisfaction, internal processes, and the organization s innovation and improvement activities-operational measures that are the drivers of future financial performance (Kaplan and Norton, 000). This paper describes the cascading Balanced Scorecard. Cascading a balanced scorecard means to translate the corporate-wide scorecard down to departments (DBSC), and then teams or individuals (PBSC). The main purpose of this paper is to develop integration model of PBSC and Contribution Related Pay (CRP) for supporting incentive-based payment. This study is based on a case study that should carry appropriate mission and vision. With the existing resources and targets, some strategic themes are constructed. The OBSC then is deployed into DBSC for each department and PBSC for some sample employees. The resulted PBSC then will be integrated with CRP model. This integration model of PBSC and CRP will help the company in determining incentive-based payment for the employees. Tying compensation to strategically aligned performance metrics helps employees to be more engaged and increases productivity. Keywords: Personal Balanced Scorecard, Contribution Related Pay, incentive-based payment. Introduction The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. The Balanced Scorecard is one of the most widely adopted strategic planning tools used by businesses today. Unfortunately, most companies fail to translate the resulting strategy into actual business results. But successful executives are now discovering that new breed of applications * Corresponding author. address: meitha@ubaya.ac.id ; rositameitha@yahoo.com

2 56 R. Meitha Integration Model of Personal Balanced Scorecard... enables them to cascade strategy, link individual performance to strategy, and attain proactive visibility - thus achieving the competitive advantage of a workforce that consistently delivers on strategic objectives. This paper describes the cascading Balanced Scorecard. Cascading a balanced scorecard means to translate the corporate-wide scorecard down to departments (DBSC), and then teams or individuals (PBSC). This paper also describes integration model of BSC deployment (Personal Balanced Scorecard-PBSC) and Contribution Related Pay (CRP) for supporting incentive-based payment. A company can reach unprecedented success by actualizing the business strategy and taking several critical steps:.cascading the Balanced Scorecard to every individual in the company, linking employee performance measures and rewards to execution of strategy, and making operational decisions through proactive visibility (using sorecards).. Literature Review.. Balanced Scorecard Balanced Scorecard is a set performance targets and approach to performance measurement that stresses meeting all of the organization s objective relating to its critical success factors (Niven, 00). The primary goal of a business is long-run profit maximization that will be achieved through a balanced scorecard of performance attributes grouped around four perspectives: Financial Perspective measuring various financial performance indicators of primary interest to shareholders Customer Perspective comprising measures of customer satisfaction; Internal Business Perspective which measures internal efficiency and quality; and Learning and Growth Perspective which attempts to measure the organization s ability to adapt to changes required by a changing environment. Balanced Scorecard attempts to include all financial and non financial measure as part of information system for employees in all level of organization. Balanced Scorecard should be able to translate mission and strategy of business unit into various objectives and measures. According to Niven (00), question in deployment of Organizational Balanced Scorecard (OBSC) is what should we do in our level management to help organization in achieving goals?. Scorecard deployment should be related to OBSC, but each department in organization can have different issues in achieving organization s goals. Figure shows the cascading of Balanced Scorecard. Figure : Cascading Balanced Scorecard (Niven, 00) The rd International Conference on Technology and Operations Management (ICTOM) Conference Proceedings 0 ISBN:

3 R. Meitha Integration Model of Personal Balanced Scorecard Balanced Scorecard could be deployed into all level organization. However, some factors should be considered: linkage to related Scorecards, linkage to strategy, appropriate target and coverage of key objective. Personal Balanced Scorecard (PBSC) is the final border of Balanced Scorecard deployment. Rampersad (00) said that Personal Balanced Scorecards is an individual work plan in operational level and focuses on the job (job-oriented competence) and performance improvement in daily activity. There are four perspectives in PBSC namely: financial, external, internal, learning and growth (Niven, 00). The benefits of Personal Balanced Scorecards are building awareness of the Balanced Scorecard, generating commitment to the Scorecard, increasing comprehension of aligned Scorecards, offering a clear line of sight from employee goals to organizational strategy and building support for the goal-setting process... Contribution Related Pay There are several methods in determining salary or incentive for employees of organizaton, namely: Performance Related Pay, Competence Related Pay, Team Based Pay and Contribution Related Pay. Contribution Related Pay is a flexible method that someone will get related to the contribution. This method is also called as point system that frequently used in job evaluation system. Figure describes the paying contribution model (Armstrong, 00). Contribution Related Pay method considers paying for past performance as well as for future success (target setting). Contribution pay is a relatively new concept. It combines elements of both performance and competency based pay schemes by recognizing employee achievements and competencies.. Research Methodology Figure : Paying Contribution Model After setting the research objective, the next step is constructing the research model. Figure reveals the research model applied in order to achieve the research objectives. Figure : Research model The rd International Conference on Technology and Operations Management (ICTOM) Conference Proceedings 0 ISBN:

4 58 R. Meitha Integration Model of Personal Balanced Scorecard... The research model was applied in a manufacturing company as a case study. Regarding the research model, there are several step in this research: Determining Matrix SWOT: conducting focused-group discussion to determine strength, weakness, opportunity, threat; and then strategies of the company. Constructing Organizational Balanced Scorecard (OBSC): translating vision, mission and the strategies into several Key Performance Indicators (KPI) and also determine the cause and effect relationship between KPIs. Scorecard includes objectives, KPIs, targets, weight and scoring criteria. The weight of each KPIs is set using Pairwise Comparison method. Cascading OBSC into Department Balanced Scorecard (DBSC) for each department. The steps in constructing DBSC is similar to OBSC. Deploying DBSC into Personal Balanced Scorecard (PBSC) for some sample employees. The process of designing PBSC in this research combined PBSC method from Niven (00) and Rampersad (005). The framework of PBSC used is followed the PBSC method from Niven (00), while the perspectives of PBSC followed the PBSC method from Rampersad (005). Figure 4 shows the PBSC from Rampersad (005) and Niven (00). Figure 4 PBSC Applying job evaluation. Before using the PBSC in CRP, each job should be evaluated. Measuring performance using OBSC, DBSC and PBSC. In this step, we applied the scorecards that have been designed in order to measure the performance of the company, each department and some sample employees. Designing incentive-based payment using Contribution Related Pay (CRP) method. The result of employee performance measurement become the input in CRP method. CRP method considers some factors regarding compentence and performance (Armstrong, 00). Applying the incentive-based payment and comparing to the former method in this company. 4. Result and Discussion In this part, we will elaborate the result of each steps discussed in the research methodology. As discussed before, the research model was applied in a company as a case study. 4.. Organizational Balanced Scorecard (OBSC) After determining Matrix SWOT, we design Organizational Balanced Scorecard (OBSC) by translating vision, mission and the strategies into several Key Performance Indicators (KPIs). Scorecard includes objectives, KPIs, targets, weight and scoring criteria. The weight of each KPIs is set using Pairwise Comparison method. Table -4 shows the design of OBSC for the company as case study. Table : Design of Organizational Balanced Scorecard Financial Perspective. Improve sales volume and Return on Investment Return on Investment (RoI). Enhance current liability payment Quick Ratio (QR). Improve working capital turn-over Working Capital Turn Over (WCTO) 5% 0.06 RoI 5% % RoI < 5% RoI < % 50% 0.60 QR 50% 00% QR <50% QR < 00% times 0.6 WCTO = x WCTO x The rd International Conference on Technology and Operations Management (ICTOM) Conference Proceedings 0 ISBN:

5 R. Meitha Integration Model of Personal Balanced Scorecard Table : Design of Organizational Balanced Scorecard Customer Perspective. Percentage of New 0% 0.6 NC 0% Improve Quality-Cost- Delivery-Service (QCDS) Customer (NC) 5% NC < 0% NC < 5%. Percentage of Customer Retention (CuR) 90% 0.60 CuR 90% 80% CuR < 90% CuR 80%. Enhance promotion program Complaint Rate (CoR) 0% 0.06 CoR 0% 0% CoR > 0% CoR > 0% Table : Design of Organizational Balanced Scorecard Internal Business Process Perspective. -Improve Management Information Sysem Process Improvement (PI) 0 days 0.87 PI 0 days 0 days PI < 0 days -Improve value behavior PI 0 days. -Improve logistic management -Improve production process Percentage of On Time Delivery Time (DT) 00% 0.56 DT = 00% 90% DT < 00% DT < 90%. Partnership with research agent Percentage of new Product (NP) 4. Improve production process Machine Idle (MI) 5. Improve product innovation Eficiency of operation & investment cost (EOI) 50% 0. NP 50% 40% NP < 50% NP < 40% 60 hours per year 0. MI 60 hours 70 hours MI < 60 hours MI 70 hours 5% 0. EOI 5% 5% EOI 5% EOI < 5% Table 4: Design of Organizational Balanced Scorecard Learning and Growth Perspective. Reward System Salary Rate (SR) 00% Minimum Salary (MS) SR 00% MS 00% MS SR < 00% MS SR < 00%. Man Power Planning Employee Productivity (EP). Training Program Employee Quality (EQ) 4. Hardware Optimalization Facility Availability (FA) 05% Sales 0.6 EP 05% 00 % EP < 05% EP < 00% hours 0. EQ hours 6 hours EQ < hours EQ < 6 hours 00% FA = 00% 80% FA < 00% FA < 80% 4.. Department Balanced Scorecard (DBSC) After designing Organizational Balanced Scorecard (OBSC), we deployed the scorecard into scorecard of each department in the company. The organization alignment should be clearly visible using strategy map, performance measures, targets and initiatives. Table 5-7 shows the example of DBSC for Production Department. Table 5: Design of Department Balanced Scorecard Customer Perspective for Production Department. Improve Quality-Cost-Delivery- Complain Rate Service (QCDS) (CoR) 0% CoR 0% 0% CoR > 0% CoR > 0% The rd International Conference on Technology and Operations Management (ICTOM) Conference Proceedings 0 ISBN:

6 50 R. Meitha Integration Model of Personal Balanced Scorecard... Table 6: Design of Department Balanced Scorecard Internal Business Process Perspective for Production Department. -Improve Management Information Sysem -Improve value behavior. -Improve logistic management -Improve production process. Partnership with research agent Process Improvement (PI) Percentage of Delivery Time (DT) Percentage of new Product (NP) 4. Improve production process Machine Idle (MI) 5. Improve product innovation Eficiency of operation & investment cost (EOI) 0 days 0.56 PI 0 days 0 days PI < 0 days PI 0 days 00% 0.87 DT = 00% 90% DT < 00% DT < 90% 50% 0. NP 50% 40% NP < 50% NP < 40% 60 hours/year 0. MI 60 hours/year 70 hours/year MI < 60 hours/year MI 70 hours/year 5% 0. EOI 5% 5% EOI I 5% EOI < 5% Table 7: Design of Department Balanced Scorecard Learning and Growth Perspective for Production Department. Man Power Planning Employee Productivity (EP) 05% Sales 0.87 EP 05% 00 % EP < 05% EP < 00%. Training Program Employee Quality (EQ) hours EQ hours 6 hours EQ < hours EQ < 6 hours. Hardware Optimalization Facility Availability (FA) 00% 0.87 FA = 00% 80% FA < 00% FA < 80% 4.. Personal Balanced Scorecard (PBSC) The next step is deploying the DBSC into Personal Balanced Scorecard (PBSC) for some sample employees. Table 8- shows the example of PBSC for sample employees (staffs). Table 8: Design of Personal Balanced Scorecard Financial Perspective. Improve Employee Productivity Employee Productivity (EP) 05% Sales 0,5 EP 05% 00 % EP < 05% EP < 00%. Reward System Salary Rate (SR) 00% Minimum Salary (MS) 0,75 SR 00% MS 00% MS SR < 00% MS SR < 00% Table 9: Design of Personal Balanced Scorecard External Perspective. Teamwork Culture Number of Complain (NC) 0% NC < 5% 5% NC < 0% NC 0% Table 0: Design of Personal Balanced Scorecard Internal Perspective. Improve Employee Total Practice Quality (TP) hours TP hours 6 hours TP < hours TP < 6 hours The rd International Conference on Technology and Operations Management (ICTOM) Conference Proceedings 0 ISBN:

7 R. Meitha Integration Model of Personal Balanced Scorecard... 5 Table : Design of Personal Balanced Scorecard Learning and Growth Perspective. Report handling Percentage of Right and On Time Reported (ROTR) 00% 0,5 ROTR = 00% 90% ROTR< 00% ROTR < 90%. Absenteism Absent (Ab) 7 days per year 0,5 Ab 7 days 7 days Ab days Ab > days. Improve Product Quality Standard Fufillment (SF) 4. Hardware Optimalization Management Information System (MIS) 00% 0,5 SF =00% 90% SF <99% SF < 90% 00% 0,5 MIS = 00% MIS = Performance Measurement and Contribution-Related Pay (CRP) After constructing Organizational Balanced Scorecard (OBSC) and deploying into DBSC and PBSC, we applied the scorecard in measuring performance of the company, each department and some sample employees. The final step is designing incentive-based payment using Contribution Related Pay (CRP) method. Table and shows the weight of factors used in CRP and the maximum point for each factor. The result of employee performance measurement (using PBSC) become the input in CRP method (in Performance factor). Table : Weight of Factor used in CRP No Factor Sub factors Weight Skill 45% Competence Effort 5% Responsibility 0% 4 Working condition 6% 5 Performance Performance Score 4% Table : Maximum Point for each Factor No Factors Maximum Point Competence I. Skill and Experience. Education 0. Experience 0. Initiative 0 4. Skill 5 5. Control rate 0 6. Span of control 0 7. Inter-personal relationship 0 II. Effort. Mental 5. Physical 0 III. Responsibiity 5 IV. Working condition. Workplace condition 5. Environment aspect 4 V. Performance (using score from PBSC) Performance Score a..00 performance score <.67 b..67 performance score <. c.. performance score The rd International Conference on Technology and Operations Management (ICTOM) Conference Proceedings 0 ISBN:

8 5 R. Meitha Integration Model of Personal Balanced Scorecard... Then we used table and in determining employee s point. The maximum Rupiahs per point is Rp.,589. This maximum Rupiahs per point is used to determine the salary for each employee (see table 4). Comparing with former method used in this company, the employees salary are set considering their performance. Moreover, the result shows that the salary determination has already fulfilled the requirement of minimum salary. 5. Conclusions Table 4: Employee s point and Salary No. Sample employee Rupiahs per point Employee s Point Salary (Rupiah) Staff Rp, Rp,,65 Staff Rp, Rp,480,908 Staff Rp, Rp,47,4 4 Staff 4 Rp, Rp,444,66 5 Staff 5 Rp, Rp,499,0 The benefits of using Balanced Scorecard deployment are building awareness of the Balanced Scorecard, generating commitment to the Scorecard, increasing comprehension of aligned Scorecards, offering a clear line of sight from employee goals to organizational strategy and building support for the goal-setting process. By cascading BSC, BSC is applied as measurement tools, strategic management system, and communication aids. The integration model of BSC deployment (Personal Balanced Scorecard-PBSC) and Contribution Related Pay (CRP) could be applied in supporting incentive-based payment for the employees. Directly linking every employee s performance measure and rewards to their execution of corporate strategy is valuable because tying compensation to strategically aligned performance metrics helps employess to be more engaged and increases productivity. Linking employees metrics and rewards to business strategy ensures that their efforts are focused on what is truly critical the business success. Acknowledgements I would like to thank Dr. Fuad Achmadi and Yuni Dewi Martini for their contribution by applying the research model in the company. References [] Armstrong, Michael. (00). Armstrong s Handbook of Reward Management Practice. [] Kaplan, Robert S. & Norton, David P. (000). Balanced Scorecard: Translating Strategy into Action. HBS Press, USA. [] Kaplan R.S. and Norton D.P. (000). The Strategy-Focused Organization, HBS Press, USA. [4] Niven, Paul R. (00). Cascading the Balanced Scorecard: a Case Study on Nova Scotia Power, Inc. [5] Niven, Paul R. (00). Balanced Scorecard Step by Step: Maximizing Performance and Maintaining Results. New York: John Wiley & Sons, Inc. [6] Rampersad, Hubert K. (005). Total Performance Scorecard. Jakarta: Gramedia Pustaka Utama. Cite this paper Meitha, R. (0). Integration Model of Personal Balanced Scorecard and Contribution-Related Pay for Supporting Incentive-Based Payment, Proceedings of The rd International Conference on Technology and Operations Management: Sustaining Competitiveness through Green Technology Management, Bandung Indonesia (July 4-6), pp ISBN: The rd International Conference on Technology and Operations Management (ICTOM) Conference Proceedings 0 ISBN: