By Derek Irvine
Getting compensation formulas right can be challenging, ensuring that leaders maintain a balanced focus on short-term results as well as long-term value creation. Traditional levers in those formulas have been in the form of various financial metrics. Companies are also increasingly turning to nonfinancial metrics as well, to reflect more of a balanced scorecard approach.
The efficacy of nonfinancial metrics is the subject of some debate, however, captured in a recent research highlight in MIT Sloan Management Review. Discussing that research in this recent post on Compensation Cafe, I believe the issue boils down to two main questions:
whether [those] metrics are indeed related to a firm’s ability to create value, and appropriate to include in compensation formulas [and] the extent to which these types of metrics can be cascaded to compensation formulas for managers, aligning measurement and value creation across the entire organization
The first part is largely answered by the research in question, calling for organizations to assess the degree of influence (as a lead indicator) that a metric can have in predicting the creation of value. A related issue is the measurement of nonfinancial metrics, in terms of both accuracy and reliability.
But as I write in the full post, these concerns may be rapidly receding in an era of big data and crowdsourcing:
Imagine the insights that can be afforded by having recognition data not only on specific behaviors that align to a company’s core values or results, but also on the social relationships that capture patterns of collaboration, teamwork, and innovation.
Crowdsourced data may also help widen the scope from traditional nonfinancial metrics, like engagement and satisfaction, to the full range of activities that impact the bottom line. Instead of metrics that are infrequently captured in annual or semiannual surveys, real-time data is generated on accomplishments and results, as well as key behaviors like recognition and coaching.
The availability of nonfinancial metrics that are crowdsourced helps to answer the second part of the question, cascading the use of those metrics in compensation formulas across the company to align behavior and drive long-term value.
Which nonfinancial attributes do you think leaders across the company should be compensated on?