1 INTRODUCTION

Managers, today, are challenged by sweeping changes in the global arena. In such a competitive and complex environment, performance evaluation and effective reward systems are keys to business organization in achieving competitive edge. However, a critical task that all companies must face is how to measure employees performance and how to reward employees based on performance. On realizing the shortcomings of financial measures, performance measurement models attempts to blend both financial and non-financial measure together at all level of company (Andrew, G. & Brian H. K., 2001). This report focuses on two such models known as BSC and TBL. In the first section, this paper presents a literature review on the salient features arising form their use, and thence compare and reveal differences as well as similar between them. The following section depicts various theories of motivation and explains how they relate to reward system. Thenceforth, forms of compensation plans will be identified and clarify which ones are more suitable for individual or group accomplishment. Additionally, it also discusses whether rewards given to top executives are similar or different to non-employees. In order to connect between theory and practice, the last section researches and analyses how Phillips Electronics and Shell implement their performance model and rewards system.

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PERFORMANCE MEASUREMENT SYSTEMS

2.1

Balanced Scorecard

BSC is a performance measurement tools that incorporate both financial and nonfinancial performance measures into organisational management systems to translate organisational visions and strategies into performance objectives (Crawford & Scaletta, 2005). It aims to balance the financial outcomes of an organization with internal and external issues of human performance that focuses on corporate strategy in four different perspectives which are shown below (Figge & Hahn 2002):

Financial Perspective determines an organisation's progress towards desired financial results and measures the best results of the business to provide to its shareholders. Financial goals encourage managers to evaluate the effectiveness of their strategies and operating plans besides helping employees relate the activities to the entity's financial outcomes.

Customer Perspective focuses on customer needs which can satisfy their satisfaction that will eventually create value for customers and more likely to generate desired financial results. It is usually evaluated using outcome measures such as market share and customer satisfaction.

Internal Business Perspective concentrates on the key internal processes' performance that drives the business and identifies internal business processes that enable the firm to meet the expectations of customers in the target markets and shareholders. Its purposes are to improve processes that will increase customer satisfaction and the efficiency of operations.

Learning and Growth Perspective directs attention to achieving future success by discovering new and better strategies. Managers identify opportunities for enhancing the capabilities of employees, information systems and operating procedures.

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Metrics used in the balanced scorecard to measure how well the organisation performs against predefined goals and targets are called key performance indicators (KPIs). The two major types of KPIs are leading and lagging indicators whereby leading measures are indicators of future performance while lagging measures are indicators that indicate how well a company has already done (Walker & MacDonald 2001). Leading indicators are an effective measure because it gives managers more time to influence the outcome by making high quality decision.

2.1.1 Advantages and Disadvantages

Advantages Guidance for improvements which enables periodic performance

Disadvantages Mistakes ambiguous in or implementation generally as

defined

reviews of progress toward vision and strategies that leads to improved financial performance to help for decision making. Communication and linkages

objectives are defined. Information systems not integrated, insufficient resources, lack of senior management supporting, doubt about links among perspectives and

encourage clarification and link of performance objectives to the vision and strategies which help to improve communication and consensus

focusing on inappropriate objectives can lead to uncertainties.

throughout the organisation.

Figure 1 Advantages and disadvantages of implementing balanced scorecard

2.1.2 Challenges Faced Lack of senior management commitment The delegation of the project to middle management and defining the project as performance measurement failed because it misses focus and alignment to implement strategy. Senior management should support and lead defining the project as performance measurement.

Time Consuming

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During the implementation process, the strategy might change if the implementation takes too long. This will result in some of the indicators becoming obsolete and requires new indicators.

Too few measures The organisation will fail to obtain a balance between leading and lagging indicators or financial and non-financial indicators when too few measures in each perspective are constructed. It obtains only the measures that reflect the strategies and the most critical ones that are linked to the organisation's vision.

2.2

Triple Bottom Line

In order for an organisation to be socially sustainable in the long run, actions must be taken to ensure that sustainable management of natural and human resources has contributed, as well as the well-being of society and the economy as a whole. Triple Bottom Line focuses on working towards environmental, social and economic outcomes by assisting organisations in developing a strategic planning process that integrates all three pillars of it (LAL Annual Report, n.d.): - Economic outcomes (profit) measured in traditional ways and it includes wages and benefits, labour productivity, job opportunities, expenditures and development and investments in training and other forms of human capital. - Environmental outcomes (planet) impact of the firm's operations on the environment which includes effects of processes, products and services on air, water, land, biodiversity and human health. Social outcomes (people) relates to health and safety of employees and other stakeholders including workplace health and safety, employee retention, labour rights, human rights and wages and working conditions at outsourced operations.

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2.2.1 Advantages In economic outcomes, an ability to increase product sales through welldeveloped marketing campaigns can be clearly demonstrated. A credible, practical and unblemished environmental image that corporate partners can align with to provide the infrastructure to successfully run environmental projects in the environmental outcomes. As for the social outcomes, providing companies with the opportunity to interact with and activity or involvement to generate staff interest.

2.2.2

Challenges Faced Measurement for environmental factors and social is not easy as a global standard for such a measurement is not always identifiable and quantifiable. Injustice between powerful and powerless groups may be caused as subjectivity in evaluating global measurement is unavoidable. Does not include the specific internal strategies and performance drivers that an organisation can use for its present and future operation.

2.3

Comparison between BSC and TBL

Both systems aim at linking an organisation's vision to operational-level objectives and support the development of specific strategic-level performance measures. BSC It is more prescriptive and may provide more concrete guidance on priorities. TBL It uses a more flexible methodology that emphasizes building capacity within an organisation BSC is more towards developing an organisational planning structure that integrates human factors, both internal and external, with conventional planning around financial outcomes. TBL focuses more explicitly economic, on and to develop its own

principles and priorities.

identifying

social,

environmental sustainability aspects and integrating these into organisational

planning, from the strategic level to the operational level. Figure 2

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3. MOTIVATION THEORIES & REWARD SYSTEM

3.1 Abraham Maslows Hierarchy of Needs theory

Maslow (1954) has set up a hierarchy of five levels of basic needs. The basic of this theory is that human beings are motivated by unsatisfied needs, and that certain lower needs need to be satisfied before higher needs can be addressed. Starting from the bottom of the pyramid, they are general needs (physiological, safety, love, and esteem) which have to be fulfilled before a person is able to continue to move toward growth, and eventually self-actualization.

Self-Actualisation Esteem Social Safety Physiological (Abraham Maslow, Motivation and Personality, 1954)

Physiological needs: Needs are essential for sustaining the human life such as foods, water, protein, salt, sugar, calcium, other minerals and vitamins, shelter and sleep, etc.

Safety needs: The second layer of need is free of physical danger and the fear of losing security off family, shelter, job and property.

Social needs: People feel the needs for friends, a sweetheart, children, affectionate relationships in general, even a sense of community.

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Esteem needs: They include not only internal esteem factors such as self-respect, achievement, and autonomy but also external factors like status, attention and reorganization.

Self-Actualization: The highest layer includes growth, achieving ones potential and self-fulfilment.

3.2 Herzberg's Theory

Herzberg (1968) suggested that there are two factors that affect employee behaviour which are hygiene factors and motivators whereby hygiene factors are factors that provide the necessary setting for motivation but do not motivate employees themselves while motivators are factors that relate job content or to outcomes of the job that will encourage motivation. A certain level of hygiene factors is needed to prevent dissatisfaction. Powerful factors that Herzberg's theory suggests are such as achievement, recognition and responsibility. Herzberg recommends that extrinsic rewards are not motivators but provide only the setting for intrinsic rewards. However, it is believed that extrinsic rewards are motivational for the proliferation of performance-related pay systems.

3.3 Expectancy theory Unlike Maslows Hierachy of need theory and Herzbergs two factors theory, Expectancy of motivation theory (Vroom, 1964) does not focus on needs but rather than concentrate on outcomes. Expectancy theory says that individuals have different set of goals and can be motivated if they have particular expectation. Individuals will behave based on the outcome they expect and the attractiveness of those expected outcomes. Vroom formed the expectancy theory using three concepts:

1 Individual Effort Individual Performance

2 Rewards

3 Personal Goals

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1. Expectancy: is the belief that high levels of effort will result in attaining of high level of desired performance. 2. Instrumentality: is an individuals perception about the extent to which performance at a certain level will lead to the attaining of outcomes (rewards). Expectancy is, thus, the belief that if a person performs well that a valued outcome will be received. 3. Valence: refers to the importance that an individual personally places on the reward. When people have higher valence, they tend to have higher motivation. (Langfield-Smith, Thorne & Hilton 2006).

In short, high motivation results from high level of expectancy, instrumentality, and valence. This means if any one factor is low, motivation will be low. Managers, hence, should strive to ensure employees three above concepts are high so that they will be highly motivated.

3.4 Form of rewards According to Michael (2002), a rewards system consists of financial rewards, employee benefits and non financial rewards.

Financial rewards (FRs):

Base Salary: is the basic level of pay which each person receive for doing a job. It may provide a platform for determining additional payment related to performance, competence, and pension. Level of pay can be agreed through negotiation or be measured based on job evaluation and market rate.

Variable pay (performance related to pay): is additional FRs which is provided based on individual or group performance. Organizations can choose to implement a variety of variable pay programs at the same time including:

Individual incentive plans rewards for achieving individual performance goals which will be tied to outcome and rewards.

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Profit-sharing plan is organization-wide program where cash bonuses are paid to each employee based on a specified percentage of the companys profit. This plan rewards individuals but based on the organizational performance.

Employee share plan is a plan that gives employees a right to purchase shares in the company at a specified price and specified future time.

Gain sharing is an incentive plan which improvements in group productivity gain.

Team-based incentive plan is designed to encourage group accomplishment and corporation among employees, in which each employee is rewarded if their work team exceeds certain performance goal. (Langfield-Smith et al 2006)

Employee benefits: is indirectly payment such as pension, sick pay, insurance cover, annual holiday, and company car, etc.

Non-financial rewards (NFRs): Besides Financial rewards, NFRs are alternative motivators that can act to influence employee behaviour and enhance employee motivation, including: - Achievement is the need for competitive success measured against a personal standard of excellent. Organizations can create achievement through processes such as job design, contributing skill or competency-related pay schemes. - Recognition is one of the most effective of NFRs. Individuals need to know not only how well they achieved their goals or carried out their work but also that their achievement are appreciated. Recognition can be promotion, allocation to high profile-project, listening to and acting upon team members suggestions and, importantly, acknowledging their contributions. - Individuals are also be motivated by being given more responsibilities on their own jobs. More responsibilities organization gives their employees, more selfconfident they feel over setting their goals as well as over defining the path to these goals.

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- Additionally, organizations also use influence and personal growth as powerful form of rewards to motivate their employees. Any individual personally wishes to get a dream job with high achievement, recognition, responsibility, influence, and personal growth. These forms are means to satisfy the need of individual. They, therefore, are more suitable for individual accomplishments. 3.5 Rewards for Executives and Non-executive Employees The Cadbury Report (1992) reported that the roles of non-executive employees are they usually have a breadth of experience and have particular personal qualities. Top executives contrive strategies and formulate policies to ensure that the goals and objective of organisation are met (Job Descriptions, Definitions Roles, Responsibility: Top Executives, n.d.). The basis of rewards should be distributed based on contribution and performance of the employees instead of whether they are executives or non-executive employees. As the non-executive employees do not involve themselves in the day-to-day running of the business, they can bring fresh perspective and contribute more objectively in supporting. As a result, excellent performance of the non-executive employees can be portrayed clearly. Therefore, the basis of reward for top executives and non-executive employees should be varies.

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4. COMPANY ANALYSIS OF PMM & REWARDS

4.1 Phillips Electronics Phillips Electronics is one of the largest, multinational electronic companies with several division and vast product diversity all over the world. The rapid change in the external environment as well as the growing influence of Asian competitors made Phillips Electronics realize the need of to respond quickly to these changes. BSC has been applied to streamline Phillips complicated process and structure. Phillips has used the BSC to communicate the strategy across its divisions that had more than 120,000 employees spread across 150 countries all over the world. It was implemented from top the Board of Directors - to all Phillips divisions and companies worldwide, with its purpose be aligning company vision at all level, enabling the employees understand the companys strategic goals and vision of the future, educating them on what drives the business success as well as their role and relationship with vision and strategy.

Firstly, Phillips identified hundred of factors which were important to create value and they were grouped under four critical success factors (CSFs) on the Phillips scorecard, including:

Competence: knowledge, technology, leadership and team work Key Performance Indicators (KPIs): Organizational development and IT support

Processes: drivers for performance KPIs: Operational excellence Customers: value propositions KPIs: Customer delight and employee satisfaction Financial: value, growth, and productivity KPIs: Profitable revenue growth

The top level scorecard criteria were determined first in order to drive the lower level scorecard criteria.

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Secondly, a performance management system was set up to measure progress against the corporate vision and strategy. This system created link between short-term actions with long-term strategy that can make employees understand their day to day activities and thence achieve the companys strategic targets. (Gumbus & Lyons, 2002)

As a result, Phillips has realised significant benefit from implementing a worldwide scorecard system. It has taken management teams through a process, with creating awareness about the business environment, competitor behaviour, the market, technology and product road maps (www.europartnership.com 09/09/2009). Hence, Management has used the BSC to communicate strategy and align employees with strategy at all level of the organization. Employees have embraced and use the scorecard to share success practise as well as to improve their performance. Significantly, at Phillips, BSC has been used as a useful instrument to evaluate actual performance against the targets and to link individual reward and company-wide performance (Gumbus & Lyons, 2002). Phillips annual report -2008 shows overall score leaped from 64% (2007) to 69% favourable above its annual target and closing in on the high performance-benchmark.

The remuneration policy of Phillips aims to give employees sustainable rewards, to motivate and retain them, and to attract other high qualified staffs to enter into Phillips service. They are competitive at the median of comparable companies in the general industry and in terms of performance (Phillips Remuneration policy, 2009). Phillips remuneration policy includes:

Base salary:

It based on a function-related salary system and reflects the market value of the job. Due to economic downturn, salaries of the members of the Board of Management will not be increased in 2009 and Phillips will be restricted in the salary review for all employees. (Phillips Annual report, 2008)

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Variable pay: Pay for performance

Focusing on performance and reorganizing employees for the achievement of specific results. Almost everyone within Phillips has a performance-related score to their pay. There are two types of programs: Short-term incentive - Annual incentive (AI) bonus:

KPIs and individual performance rating are linked to determine the variable cash incentive payout. Each business unit will formulate KPIs according to their needs and drivers. The annual incentive payout is computed based on the level of achievement of the KPIs and the weighage assigned if there are more than one KPI. When AI for level of staff is determined, individual employees will be rewarded based on their performance rating. For members of the Board of Management, the on-target AI percentage is set at 80% of base salary for CEO, and 60% of base salary for other members. AI paid in any year relate to the achievement of the preceding financial year in relation to agreed targets. Long-term incentive Stock options and Shares:

It will be granted to the eligible employees depends on the performance of the individual employee and on the share performance of Phillips in the form of restricted shares and stock options. The share performance of Phillips is measured on the basis of the total Phillips shareholder return (TSR) compared with the TSR of a peer group of 12 leading multinational electronics companies over three years period as following:

Electrolux General Electric Honeywell International Matsushita Schneider Toshiba

Emerson Electrolux Hitachi Johnson& Johnson Phillips Siemens 3M Analysis for Competitive Advantage - 13 -

In 2008, there are 9,979,902 stock options and 2,321,634 restricted share rights were granted under LTIP. (Phillips Annual report, 2008)

Spot Awards:

Phillips also provides one-time payment to reward individual and teams for making contributions such as increasing efficiencies, reducing risks and saving costs. This program will help managers to recognize and immediately reward significant contribution and results. 4.2 Royal Dutch Shell PMM Used by Shell

Today, however, with rapidly increasing perception about sustainable development, many organizations have recognized the powerful combination of BSC and TBL to maximize their competitive advantage into a circle in which economic and environmental performance coupled with social impact, combines to improve organisational performance. Shell is such company that has integrated environment and social indicators in its BSC (David E. Stout et al, 2006). Shell is a global group of energy and petrochemicals companies, operating in 100 countries with around 102,000 employees (Shell annual report, 2008). Shell has adopted a version of the BSC concept to define its business strategy and to report its performance in achieving this strategy. Shells strategy is based on the principle of sustainable growth, which in broad terms means that it is devoted to developing natural capital, promoting economic prosperity, and developing social capital in all countries in which it operates. Based on the BSC, this principle is carried out by measuring and improving CSFs grouped into four categories:

Economic measures: Crude oil prices Operating profit Total debt ratio

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Environmental measures: Greenhouse gas emissions Carbon dioxide emission Total number of spills of chemical products

Social measures: Number of countries using procedures to ensure equal employment

opportunities Gender diversity, by management level Number of health and safety incidents Shell employees and partners/business integrity and strong business principles: Number of reported cases of bribery Number of countries with screening process for compliance with Shell business principles At Shell, the BSC is trying not only to generate aligning of objectives, targets, actions and processes, but also to provide a good implementation mechanism for integrating environmental and social issues through various layers of organization. (David E. Stout et al, 2006) Performance across the BSC is reported as a part of the companys TBL external report on a quarterly and annual basis. Moreover, this integration also helps Shell to strengthen the pay-performance link, and each individual and business in Shell group has a scorecard for performance measurement. Shell scorecard is set from Group to individual employee level to reflect the integrated implementation of strategic objectives. The Group uses a number of KPIs to evaluate the overall performance of the Group from financial, social and sustainable development perspective and collectively they present the Shell scorecard. (Shell annual report, 2007) Reward System Shell

Shell has regularly reviewed its compensation system to ensure that employees are being rewarded at competitive levels, as following:

all its

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Competitive base salary: reflect the market conditions of the country where employees are based and high level of skill and experience required. Executive Directors base salary is set at an appropriate market level, relevant to scope and complexity of the roles of Directors. They are benchmarked against the current oil majors (BP, Chevron, Exxon Mobil and Total) and a selection of top European-based companies consist of Allianz Anglo American AstraZeneca AXA Barclays BHP Billiton Diageo E.ON GlaxoSmithKline HSBC Nokia Novartis Rio Tinto Roche Siemens Unilever Vivendi Vodafone

Deutsche Bank Philips According to Shells annual report in 2008, total employee remuneration cost is $10,581 million compared to $10,021 in 2007. Executive Director base salary increase of between 5% and 8% in 2008.

Annual Incentive: Shell also recognizes and reward individual achievement through performance-related pay and bonus. Shell scorecard is used to determined remuneration for staff, Senior Management and Executive Directors. Executive Directors annual bonus is designed for achieving results that further Shells objectives against Shell Group scorecard. Bonuses are based on this score multiplied by the target bonus level. Based on Shell scorecard result in 2008, annual bonuses payable are 188% for CEO and 138% for other Executive Directors.

Long-term incentives: consist of Long-term incentive (LTI), the Deferred Bonus Plan (DBP), the Restrict Share Plan (RSP)

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 LTI : an award of performance share made conditionally once a year to eligible Executive Directors. The number of shares awarded multiplied by share price at the time of award can not exceed four times base salary and will be delivered after three years depending on the relative performance. DBP : it encourages share ownership by allowing Executive Directors to invest up to 50%, and no less than 25% of their annual bonus in deferred bonus shares. RSP : awards with a face value of one times base salary made on a highly selective to senior staff and Executive Directors continuous employment.

Global Employee Share Purchase Plan: gives eligible employees (exclude Executive Directors) the chance to buy shares in one the companies of Shell. If the shares are help in the plan during twelve month period, the employee will receive an additional 15% share allocation.

Other benefits: offering typically pension or retirement plans and healthcare coverage to employees. (Shell annual report, 2008)

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5 CONCLUSION
Issues arising from use of BSC and TBL have been discussed for implementing the performance measurement tools to assist the decision making process of the organization. Although there are few limitations of using BSC and TBL, their advantages seem to overweight them. Phillips and Shell are two typical examples take many benefits from applying BSC in their organizations as well as strengthen their remuneration system. However, Shell has created a sustainable development by integrating both BSC and TBL in its strategy.

Several theories of motivation have been discussed which helps to guide managers in motivation and designing reward systems for employees such as Maslows theory, Herzbergs theory and expectancy theory. Different companies use different reward systems to retain and to motivate their employees. By offering attractive reward systems, employees will be enthusiastic in performing better for the organisation.

Top executives and non-executives employees should not be given the same basis of rewards as their contribution and responsibilities to the organisation are not the same.

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