Kaplan and Norton Propose, \"What

¶ … Kaplan and Norton propose, "What you measure is what you get. Senior executives understand that their organization's measurement system strongly affects the behavior of managers and employees." (Kaplan, 1992) Kaplan and Norton were addressing a growing dissatisfaction with company assessment based solely on shareholder approval. The new assessment model they laid out came just at the beginning of the boom period of the 1990's marked by the shift from the heavy industry and manufacturing-based Old Economy to the information technology and telecommunications-based New Economy. Kaplan and Norton propose that in the New Economy, the former financial-based models of performance assessment that dominated the Old Economy may no longer be adequate or even relevant, particularly in environments that demand perpetual innovation. (Kaplan, 1992) in a well-cited paragraph, Bourne offers the most common critiques of old assessment models:

Traditional performance measures, developed from costing and accounting systems, have been criticised for encouraging short termism (Banks and Wheelwright, 1979; Hayes and Garvin, 1982), lacking strategic focus (Skinner, 1974), encouraging local optimisation (Hall, 1983; Fry and Cox 1989), encouraging minimisation of variance rather than continuous improvement (Johnson and Kaplan, 1987; Lynch and Cross, 1991), not being externally focused (Kaplan and Norton, 1992) and even for destroying the competitiveness of U.S. manufacturing industry (Hayes and Abernathy, 1980). At the time, many performance measurement systems in the UK and USA were heavily financially biased and it has been argued that systems which were specifically designed for external reporting were being inappropriately used to manage business enterprises (Hayes and Abernathy, 1980).

(Bourne M. a., 2000)

What was needed was not just a single measure of success but a framework through which to assess multiple indicators at once as well as their relationship to each other. After a year of research with twelve companies they devised the so-called "Balanced Scorecard," which they define as

"…a set of measures that gives top managers a fast but comprehensive view of business. The balanced scorecard includes financial measures that tell the results of actions already taken. And it 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, 1992)

By focusing on four perspectives, that of customer, internal, innovation and learning, and financial, a business can develop a broad perspective on company performance across a spectrum of values. (Kaplan, 1992)

The Scorecard is a measurement template that companies must fill out with relevant detail in order to gain relevant perspective. The company must translate its broader goals into quantifiable measures for each category. Success with customers can break down into four categories: time, quality, performance and service. (Kaplan, 1992) Internal success is a result of established business processes, including cycle time, quality, employee skills and productivity. (Kaplan, 1992) Because the New Economy demands constant innovation, companies attempting to remain competitive in constantly evolving markets must prioritize innovation and educational growth equally to customer satisfaction and internal flow. Under the heading of innovation, companies can assess their ability to develop and launch new products, their ability to create value for customers, and their ability to improve operating efficiencies and increase revenues. (Kaplan, 1992)

Financial measures can be the most problematic of measures because they focus backwards in time and fail to reflect current and ongoing strategies for value-creation. As Michael Bourne points out, "If you cut back on your research and development it affects financial performance very positively in the short-term, but of course it undermines the long-term." (Bourne M., 2008) However, if the bottom line does not reflect the improvements being made in the other three areas, then the efficacy of the improvements must be called into question. (Kaplan, 1992) That is, even if customers continue to claim to be satisfied with the value being provided, internal processes are running smoothly and efficiently and the company maintains a standard of leading innovation, and yet the profit margin does not increase, then something must still be wrong. According to Kaplan "Even an excellent set of balanced scorecard measures does not guarantee a winning strategy." (Kaplan, 1992) Citing his own case study, Kaplan points out that financial assessment can help guide the necessary tradeoffs inherent in improving a broad set of systems and meeting divergent but necessary goals. (Kaplan, 1992)

Developed in 1992, the Balanced Scorecard remains relevant to company performance assessment. In 2008, Bourne estimated that between 50% and 60% of companies in the UK used some kind of four-part performance assessment framework, but of those, only roughly 20% were using it effectively. (Bourne M., 2008) Given these statistics, however, it raises the meta-question of the effectiveness of the Balanced Scorecard and what means there may be to assess the scorecard itself. Bourne also points out that while the Balanced Scorecard can be an excellent measure for the alignment of internal goals, it utterly fails to assess the relevance of those goals within the external environment, particularly if that environment is a rapidly changing one. (Bourne M., 2008) Bourne offers the following perspective on the use of assessment frameworks: "First, as the measures are derived from strategy, the initial use to which they should be put is that of measuring the success of the implementation of that strategy. Second, the information and feedback from the measures should be used to challenge the assumptions and test the validity of the strategy." (Bourne M. a., 2000)

Following on the dissemination of the Balanced Scorecard and other four-part assessment models in commercial industry, subsequent research and theorization on the design, implementation, and maintenance of performance review frameworks has lead to a great deal of thought about the means for and nature of performance reviews outside of commercial industry. Mettanen points out that while assessment frameworks have been in use in the manufacturing and service sectors for some time, they have not readily been adopted by research organizations. Accordingly, Mettanen designed a one-year case study to be undertaken by the TTS Institute (Work Efficiency Institute) in Finland, a research, development and adult education organization, established in 1924. (Mettanen, 2004) Mettanen points out five difficulties in transferring the traditional assessment frameworks to the knowledge industry:

1) the relationship between a company and a knowledge worker differs from the relationship in a traditional company. Knowledge workers act as a small company in a larger organization.

2) Knowledge work is autonomous.

3) a knowledge worker acts in close relationship with a company's customers.

4) the results of knowledge work are very difficult to see.

5) the common process of knowledge work, problem solving, is a non-linear process and hard to describe.

(Mettanen, 2004)

What the paradigm of knowledge work lacks is an intermediary level of operation between the goals of executives and the results of the company as experienced by customers. Without this level, there is no location for management to intervene and attempt to bring the behavior of workers more in line with corporate goals. The other primary difference is the difficulty of describing and evaluating non-linear processes.

These problems in assessment posed by Mettanen are aggravated in systems wherein good performance is rewarded with better pay, known as performance-based pay systems. A pointed example is the assessment of university professors. As Langbein points out, "good' teaching is particularly hard to observe and measure. Student opinions of faculty teaching have become the preferred, low-cost mechanism by which university administrators monitor faculty teaching" (Langbein, 2006) in other words, rather than shareholder approval being the primary evaluative tool, as was seen in the financially-based Old Economy assessment models to which the Balanced Scorecard was a reaction, many universities have begun to rely upon customer satisfaction as the primary evaluative tool.

Langbein goes on to assert that there is a direct correlation between students' grades and students' evaluations of teachers. This leads to a tendency toward grade inflation on the part of the teachers because it results in better evaluations, and better evaluations lead to better pay and better research opportunities, and, ultimately, establishes a culture that is more costly to the university than would be finding an alternate means of assessing teaching quality. "If performance is accurately measured, then it will align actors' incentives so that the organization's performance is as effective as that of the ideal private sector organization. if, on the other hand, performance is mis-measured, there can be unintended consequences not only within the institution, but for the external community as well." (Langbein, 2006)

In cases where student evaluation contributes heavily to the assessment of overall teaching quality, performance is not described and evaluated by a manager, but rather, described and evaluated by the customer. These evaluations are then transferred to management and interpreted at face value. It is therefore in the best interest of the teacher to receive excellent evaluations from the customer, evaluation which, as Langbein asserts, is based primarily on the customer's graded performance in the class. (Langbein, 2006)

Performance related pay systems are not limited to the American university system. Perry et al. point out that between 2004 and 2009, Congress approved performance-based pay scales for the Department of Homeland Security and the Department of Defense. (Perry, 2009) This shift came after Congress had previously abandoned such systems that operated from 1984 to 1991 as being ultimately ineffective. (Perry, 2009) as Perry goes on to point out, the link between pay incentive and the manifestation of desired behaviors is extremely convoluted. On the employee's side of the equation are considerations including employee age, sex, job satisfaction and pay expectations, and on the organization's side of the equation are factors including the fiscal health of the organization, how the performance review is undertaken, and organizational climate, among other factors. (Perry, 2009) Perry lists a number of conclusions indicating that, in the public sector at least, performance-based pay is not a reliable means of activating managerial goals:

"Performance-related pay often has failed to trigger expected intermediate changes in employee perceptions necessary to change motivation… a variety of contextual factors appear to moderate the effectiveness of performance-related pay systems, especially the type of public service industry involved…Performance-related pay may have more effect at lower organizational levels where job responsibilities are less ambiguous, contradicting assumptions that contingent pay plans will be more effective at higher levels of organizations." (Perry, 2009)

Perry suggests that a significant difference between the successes of performance related pay systems in public and private sectors is the element of secrecy. Transparency is demanded in the public sector, whereas examples of successful performance related pay systems in the private sectors also include elements of secrecy. (Perry, 2009) Further, in the private sector, as revenue increases, pay is also able to increase. This is rarely the case in public sector work environments that have a duty to use public funds in a transparently ethical format. Ultimately, Perry et al. conclude that performance-related pay fails to achieve the hoped for the end results.

Performance related pay is intended to motivate employees to contribute more effectively and efficiently to the aims of the organization. Assessing and managing employee motivation is only one part of evaluative framework, but perhaps the most problematic part of the framework given the complexity of employee motivation. Employee motivation seems to be much more of a question in the public sector. Houston questions why the standards of the private sector should set the bar in the public sector as well. The notion that all individuals, including individuals working in the private sector are self-interested actors drives the motivation for undertaking performance related pay systems. However, the assumption that workers are exclusively extrinsically motivated may be flawed, and may be the real cause of the failure of the performance-based pay system in the public sector. That is, it may not be that performance-based pay systems are in themselves problematic, it may be that they are enacted poorly. (Houston, 2009)