“Strategic Management Accounting/Strategic Cost Management techniques are not

useful for modern day organizations”

Introduction:

Performance Management

During the last few decades, institutions and organizations have had a major contribution

towards every developed country’s growth and development. Private organizations have been

playing a major role in all sectors which were predominately managed by the government sector.

Major social tasks whether education, healthcare, environment, energy and even sectors like

defense is being entrusted to multinational companies, designed for perpetuity and managed by

world class management teams. In the present era where large corporations are playing a

significant role in economic development, the survival of the society-if not the survival of every

individual depends on the performances of these corporations. (Drucker, P.F, 1996)

Performance management is a key element of total quality management. Historically an

organizations performance was only measured by profit or loss stated in the financial reports of

organizations. However performance to be completely measured needs a mix of both financial

and non financial measures. Performance should therefore be measured by the improvements

seen by the shareholders as well as the customers. Performance management is considered to be

significant part of the strategic management technique which will be one the main topics we will

be discussing in the following essay and will be particularly emphasizing on the balance score

card and reward strategies which can help companies in the modern day world to make a

difference. All the different challenges a company faces are addressed in the discussion section.

There is not one single reason not to agree that strategic management accounting/strategic cost

management techniques are not useful for modern day organizations

.

Discussion:

As per the management advisory committee to the Australian public service, effective

performance management requires a combination of individual and business performances. This

combination helps employees to understand the organizational goals and creates awareness on

the level of performance required by each individual to achieve the goals set for short term and

long term. Integrating individual objectives with the organizational strategies helps improve

overall performance. The main reason to measure and review performance on a regular basis is

to ensure customer satisfaction, to be able to set standards, to formulate strategic plans for future

and to establish comparison with peers.

Performance Measurement Model:

In the last few decades quality management has emerged as one of the key factors for the success

of organizations. (Arumugam et al., 2009) This key factor has attracted researchers to support

quality management’s impact on the firms competitive strategies by the large number of

academic journals and articles which have been published in the last two decades. (Rahman,

2002)

A few decades ago most of the organizations reviewed their performance only based on their

financial reports mainly the cash flow statements to know the net available cash and the balance

sheet to review the overall performance of the company. However due to the development of the

balanced scorecard in the early 1990’s professor Robert Kaplan and David Norton introduced

how the integration of non financial measures along with financial measures can contribute in

measuring the company performance comparing the performance with the organization’s mission

and strategies. The main strategy for introducing the non financial measures was because through

financial measures an organization only knows what has happened in the past year, however with

the inclusion of non financial measures organizations were able to find out why it has happened.

(Phadnis, 2002). One can also argue that if the reason behind the failure is not recognized we

cannot turn around our failures into success.

The Balanced Scorecard (BSC):

It mainly focuses on four key perspectives which are stated below:

Financial Perspective: How we look to our stakeholders?

The balance scorecard includes one of the key measures of performance management which is

the financial measures which includes information about profits, return on equity, net assets, and

cash flow statements. With the help of the financial reports the actual performance of the

organization can be compared with the goals and visions of the organization. The financial

reports also indicate whether the planned strategies have been implemented. (Phadnis, 2002)

Innovation and learning: What internal processes must we excel at?

The innovative management, internal process control, employee skills, quality management,

leadership management, core competencies and internal business strategies are all customer

based measures. These measures have a great impact on customer satisfaction. Satisfying

shareholders by good return on the investments and customer retention can only be satisfied if an

organization has a strong internal control within the overall organization. (Kaplan& Norton,

1996)

The customer perspective: How must we look to our customers?

Many large organizations have continued to focus on developing strategies that have a major focus on

customers. Customer’s concerns fall into four main categories time, quality, performance and service,

and cost. Lead time measures the time required by the company to meet its customer’s needs.

Balanced scorecard measures for the customer s perspective include Customer satisfaction and

customer retention. In general all companies try to enter new markets and want to increase their

customer base, so if a particular company has a better image than of its competitors it will definitely

have a better future.

The learning and growth perspective: How can the organization learn and improve?

This particular perspective helps organizations identify on the process or departments the

organization needs to concentrate in particular to improve the organizations capabilities. Also

due to increased competition in every sector an organizations needs to continuously improve the

internal processes to satisfy the customer. This includes training and development, latest

information technology and up to date details about change in customer preferences and tastes.

(Phadnis, 2002)

Integration of environmental and social aspects in the four balanced scorecard perspectives:

The latest addition to the balance scorecard has been the environmental and social aspects which

has now become a part of the existing framework. Including this aspect when formulating

different business strategies companies can enter new markets and also attract customers,

stakeholders and investors because if companies are environmental friendly then they have a

better image than their competitors. Though this key aspect is still emerging and is already a part

of the developed world, companies in the emerging and developing countries are not far behind

by starting to focus on this aspect. The rule is simple for all the companies “if take care of them,

they will take care of us”. There are a few challenges for the public to believe in companies

because most of the companies only share highlights of corporate social responsibility in their

annual reports and do not present a detailed report on how they have become environmental

friendly. (Figge, Hahn, Schaltegger & Wagner, 2002)

Advantages :

As the name suggests the stakeholders of the organization can get a balanced view of the

organizations performance based on the four key perspectives of the BSC. (Bergen & Benco, No

Date)

Also, the BSC provides short term and long term suggestions for an organization. Unlike the

financial reports the balance card does not give us just the figures about the performance of the

company the BSC provides information about what factors led to a particular year’s performance

it may be positive or negative, and provides suggestion for improvement. For example: customer

satisfaction, inadequate employee training and market share. The BSC also helps implanting the

strategies planned for growth and development of the organization, the implementation of

performance measures for each perspective clearly relate to each other and to the mission of the

organization. (Vinuesa & Hoque, No date)

Disadvantages :

One of the disadvantages of the BSC is that with the BSC only helps organizations measure the

strategy rather than means of deciding strategy. Researchers suggest that the inclusion of the

SWOT analysis to the BSC would be a major contribution in improvising the KPI’s of the BSC.

(Lee & Ko, 2000). The BSC mainly concentrates on linking the strategies of the company with

customer satisfaction and customer based improvements. However BSC does not mention how

an organization can actually improve the market share and develop new customers. (Bergen &

Benco, No Date)

Reward strategies:

“Show me the money, show me respect and show me attention…or show me the door.”

Monetary/ Non-monetary

Jack Zigon defines rewards as "something than increases the frequency of an employee action"

(1998). This definition points to an obvious desired outcome of rewards and recognition: to

improve performance. Organizational strategies should be arranged in a line to reward systems

so as to accomplish desired goals. (Allen and Helms, 2002). For example, a company focused on

a product differentiation strategy could design their reward practices to foster innovation to

provide unique products or services. The motivational factors can be broadly divided into

monetary factors and non monetary factors.

Monetary

There is a wide variety of ways in which a business can offer financial rewards as part of the

“pay package”, including:

Salaries, Bonuses

Benefits in kind (“fringe benefits”) , Shares & options

Time-rate pay Piece-rate pay, Pensions

Studies have consistently shown that a materialistic focus in life is associated with a lower

psychological well-being. (Houran & Kefgen, 2008). Employees want to earn fair wages and

salaries, and employers want their workers to feel that is what they are getting. Money is viewed

as a fundamental incentive for satisfactory job performance.

But the research team acknowledges that money is not the only thing that concerns employees.

Beyond a certain point, higher salaries will make employees happier, but it will not “buy” better

performance. (Houran & Kefgen, 2008)

Non monetary

Another type of reward is non-monetary recognition. It acts as a motivator as it helps build

confidence and satisfaction for employees. (Keller, 1999)

So what are the most effective types of non-monetary rewards?

Recognition

Research found that being recognized by people they work directly for is the type of recognition

employees appreciates the most. (Nelson, 2004) These types of recognition can be inexpensive to

give, but priceless to receive like monthly awards, quarterly awards and annual awards. If an

employee is recognised for the hard work they have done it not only motivates the employee who

has performed well but also motivates the other employees. Another example would be related to

international exposure where an employee gets selected for international assignments for his/her

contribution towards the performance of the company. These kinds of rewards helps employees

enhance their knowledge, acquire new skills and motivate them for future development. New

departments, new positions within the organization are also sources of motivation. Furthermore

different kinds of non–monetary rewards can be for example in-house chiropractor, spa gift

certificates, days off, fancy parties and the use of personal trainers.

In the 21st century one company which apart from monetary and non monetary rewards have

really made a difference by making the workplace an exclusive environment is Google.

Companies like Google have started adoption assistance, day care, domestic partnerships

programs, counselling services and transgender and transitioning workplace support. All these

additional benefits certainly make a difference in the employee’s performance which eventually

contributes to the performance of the company.

Performance measurement model and reward system in reality: We will have a look at two

Australian companies and describe what kind of performance measurement model and reward

system they use.

National Australia Bank:

National Australia Bank is one of the four big major banks of Australia. Currently employs

40000 people, operates more than 1800 branches and has 460,000 shareholders. NAB operates in

countries like New Zealand, United Kingdom, USA and in certain parts of Asia. (nab.com.au)

The company’s philosophy has been consistent all these years for remuneration packages and

reward strategies. However there are some changes made on short term and long term incentives

based on economic conditions and the performance of the company.

The Group’s philosophy is to manage a Total Reward framework designed to:

Integration of employee rewards with organizations strategies which will maximize

shareholder value.

Attract, recognize and foster top talent.

Motivating employees who are passionate and energetic.

Reward those who deliver superior performance.

provide fair and consistent rewards, benefits and conditions

within an integrated global strategy.

Providing rewards which are similar to international standards and are competitive with

other major banks.

Build a partnership between employees and other shareholders through employee

ownership of Company shares and securities.

The remuneration policies and reward strategies are based on these philosophies mention above.

The total reward mix and fixed remuneration is determined as per the individual performance,

skills and expertise of each employee. Based on individual performance scorecards and

performance of the organization the short term incentives are rewarded. However, long term

incentives are also based on outcomes of performance. Long term incentives are planned as per

NAB’s performance. (NAB Annual Report, 2008, 2009, 2010 & 2011)

Some of the Performance and talent measures at National Australia Bank:

The performance management framework includes:

setting ‘quality gates’, which are threshold measures for compliance and behavior

expected from each employee;

setting corporate key performance indicators for the Group, which roll down into an

individual balanced scorecard of measures for each KMP; and

a peer review process where the Group CEO compares and calibrates the performance of

his collective Group reports.

Rio Tinto

Rio Tinto Ltd is one of the leading mining giants in the world. It is a part of the Rio Tinto group

which is based in the UK along with Rio Tinto Plc. The company’s head quarter is based in

London. And the head office for Australia is based in Melbourne. Rio Tinto comprises five

principal product groups - Aluminum, Copper, Diamonds & Minerals, Energy and Iron Ore -

plus two support groups: Technology & Innovation and Exploration. (Riotinto.com)

To provide a competitive salary package.

To align bonuses for both short term ad long term as per the individual performances as

well the company’s overall performance with particular emphasis on both short term

business performance and long term shareholder value creation and performance relating

to health, safety and the environment;

To provide internal equity between executives within Rio Tinto and to facilitate the

movement of executives within.

Remuneration components

Remuneration starts with a base salary. Any increases are determined with reference to

underlying Group performance and global economic conditions. In 2009 and 2010 due to the

global economic crises salaries of top executives were frozen. In the year 2010 top executives

base salary was the same as in 2008. The salaries of most senior executives are reviewed and

compared to the global standards. (Rio Tinto Annual Report, 2008, 2009, 2010 & 2011)

Performance Options

Short term incentive plan (STIP)

This is a yearly bonus plan to award employees who have had a major contribution towards the

company’s performance. Significant bonus is provided on performance against challenging

personal, business, and other targets, including safety.

Long term incentives

There are three main plans under this category and they are the Share Option Plan, the

Management Share plan and the Mining Companies Comparative Plan.

Under Share Option Plan, shares can be purchased at an exercise price which is usually lower

than the market price. Options to purchase shares are usually granted if the organization is

consistently performing well. This share option plan grants remained consistent in the last few

years.

Management Share plan was introduced in the year 2007, this plan was introduced to attract and

retain key employees. This plan is not applicable for directors. From the year since it has been

introduced this plan has been a strong retention tool. Shares for the rewards are purchased in the

market and no new shares are issued. (Rio Tinto Annual report, 2008, 2009, 2009 &2011)

It is worth to point out that both these two companies follow qualitative management processes.

Nothing has been mentioned explicitly but it seems like a mix of balance scorecard and other

strategic management techniques.

Conclusion:

Every organization faces several challenges in order to succeed to sustain and to survive. As we

have seen, performance management is a key element of total quality management and strategic

management. A combination of individual and business performances is important. To be

completely measured performance needs a mix of both financial and non financial measures. The

key highlights of this essay have been how companies have taken financial and non financial

measures to measure their own performance as elaborated by the balance score card.

Furthermore we discussed employee’s rewards strategies as they need to be motivated and

rewarded appropriately to harvest the best out of them. Finally we have seen that big companies

have put in place well designed remuneration policies well aligned with motivational theories

and performance measurement models.

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