Using Scorecard Metrics for Executive Variable Compensation

Some not uncommon questions I get from clients are: How should I use my scorecard metrics to determine variable compensation? And if so, which ones?

The easy answer is, “No, you should not, if you are just starting to use a scorecard in your organization.”

However, if your organization has been using some kind of metrics-based variable compensation for a while, it makes sense to align it to the measures in your scorecard.  If you don’t align the variable compensation metrics to the scorecard, you run into a big problem of having two separate measurement systems for the organization, which isn’t a good look if executives bonuses depend on metrics that are different from those used to measure the organization as a whole.

Therefore, you need to use the scorecard metrics and your first choice should be the ones you used in the past, if they are on the scorecard.  If not, choose metrics for which you have a consistent history. If you have baseline data and you have a pretty good idea of what thresholds, targets, and stretch targets are within reach, you will have stability and consistency using those metrics.

On the other hand, if you were to use new metrics that you just identified, you may not be sure what to expect in the future and this can cause a lot of angst and lead to unexpected results, which is exactly what you don’t want when tying variable compensation to the metrics.

So, to summarize: When tying variable compensation to scorecard metrics, if you are just implementing a scorecard for the first time, try to wait a year to see what results the scorecard metrics yield so you know what to expect.  If you can’t wait, try to tie it to metrics for which you have some history or a baseline to limit surprises.