A critical analysis of the Balanced Scorecard ­

with special consideration to its implications for HRM and HR-policy

by

Michael Hoffmann

A thesis submitted to the Department of Industrial Relations

European Master in Labour Studies

(Master Européen en Sciences du Travail)

Department of Industrial Relations

London School of Economics and Political Science

August 2007

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Abstract

The Balanced Scorecard is designed and implemented as a strategic management and measurement

system. It uses a broad range of innovative indicators and enfolds the overall strategy. Especially, it

has extensive implications on human resource processes and its strategic orientation within a

company. The development and implementation of a complete BSC is associated with the parallel

adoption of a high-performance-work-system and a long-term orientated HR-strategy. With support

of the BSC, human resource management becomes a partner with business, which manages its

employees as adding value assets and includes HRM in business strategy. HRM gains in importance

and makes an essential contribution to the business-wide human resource and organisation

development. Empirical results show that it is possible to successfully implement the BSC and the

involved long-term orientated HR-strategy in both already long-term and stakeholder orientated

enterprises and previously short-term and shareholder orientated companies. Different researchers

verified that the implementation of a BSC by simultaneous use of a HPWS is associated with an

essential improvement of business performance and development as well as better financial results

and higher profitability.

Die Balanced Scorecard wird als strategisches Management- und Kennzahlen-System konzipiert und

verwendet. Dabei macht die Scorecard von vielen innovativen Faktoren Gebrauch, welche die

unternehmensweite Strategie umfassen und beeinflussen. Insbesondere das Personalmanagement

eines Unternehmens und dessen strategische Ausrichtung sind von der Einführung einer BSC

betroffen. Entwicklung und Einführung einer vollständigen Scorecard sind mit der gleichzeitigen

Implementierung eines High-Performance-Work-Systems und somit langfristig ausgerichteter

Personalstrategien verbunden. Das Human Resource Management wird nunmehr als bedeutungsvolle

Unternehmensinstitution gesehen. Es trägt erheblich dazu bei, dass das Humankapital eines

Unternehmens als wertschöpfender und vorteilbringender Wert angesehen wird. Das Human

Resource Management gewinnt somit an essentieller Bedeutung und trägt erheblich zur

unternehmensweiten Personal- und Organisationsentwicklung bei. Empirische Studien haben gezeigt,

dass die BSC und der damit gleichzeitige Gebrauch von langfristig ausgerichteten Personalstrategien

sowohl in bereits langfristig und stakeholder ausgerichteten Unternehmen als auch in bisher noch

kurzfristig und shareholder orientierten Organisationen erfolgreich implementiert werden können.

Vielmehr haben die Studien auch ergeben, dass die Implementierung einer BSC und die gleichzeitig

erfolgende Einführung eines High-Performance-Work-Systems in einer wesentlichen Erhöhung der

Wertschöpfung und des Unternehmenswachstums resultieren als auch verbesserte finanzielle

Ergebnisse und höhere Profitabilität mit sich bringen.

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Contents

Abstract

2

1.

Introduction

4

2.

The Balanced Scorecard by Kaplan/Norton

5

2.1. The BSC as a measurement system

5

2.2. Development and design of the BSC

8

2.3. The BSC as a management instrument

10

3.

The BSC and its implications for human resource management

12

3.1. The learning-and-growth perspective

12

3.1.1

Development and measurements of the perspective

13

3.1.2.

Quality of measures and drivers

15

3.1.3.

Critical evaluation

17

3.2. Analysis of the relationship between HRM and the BSC

18

3.2.1. Contribution of HRM to the BSC

18

3.2.2.

Critical evaluation ­ opportunities and risks

20

3.2.3.

Contribution of the BSC to HRM

21

3.2.4.

Critical evaluation ­ opportunities and risks

26

4.

The BSC and its implications in high-performance-work-systems and

models of corporate governance

28

4.1. Models of corporate governance and its implication in HR-strategies 29

4.2. Impact and implications of the BSC in companies with

short-term and long-term orientated HR-policies

30

5.

Conclusion

33

Appendix

36

References

37

3

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1.

Introduction

Today companies compete in a complex and dynamic competition where organisations are

forced to conform permanently to changing conditions. With changing competition,

requirements on human resource management (HRM) and human resource (HR) policies

increase. HRM is increasingly seen as a relevant competitive factor. The Balanced Scorecard

(BSC) is an innovative measurement and management instrument which gives organisations

the opportunity to conform to and challenge these changing circumstances. The innovative

aspect is that in addition to financial objectives also customers, internal processes and even

human capital attract notice. The BSC poses a challenge to HRM, since the HR-department

changes from a passive to an active, customer-orientated, and creating part of the strategy

implementation. So through the implementation of a BSC, companies meet the new

requirements in respect of HRM and human capital gains in importance. It is increasingly

seen as one of the key drivers and primary source of competitive advantages. The purpose of

this dissertation is to point out the considered HR-aspects within the implementation process

of a scorecard and to show to what extent this process influences HRM and HR-policies and

how HRM supports management when introducing the BSC. Further it is described in detail

in which way the BSC and changing HRM have an impact on different models of corporate

governance with their different orientated HR-policies and if it can be implemented

successfully.

The dissertation is divided into three essential parts. First of all it is necessary to give an

overview about the basics of the BSC in chapter two. Intension, concept, development and

the way of implementing are shown. Chapter three covers the BSC′s implications for HRM.

At the beginning the learning-and-growth perspective, which is related to HRM to a great

extent, is considered in detail. Development and measurements are shown and examined

critically. Afterwards an analysis of the relationship between HRM and the BSC occurs. It is

investigated to what extent HRM supports and makes a contribution to the concept and

implementing process of the BSC. The analysis is completed by a critical evaluation of the

opportunities and risks and the efficiency of these contributions. The same happens to the

relation and contribution of the BSC to HRM. It is shown to what extent the BSC supports

HRM and which innovative HR-aspects are considered through the implementation of the

BSC. A critical evaluation completes this part as well. In chapter four the BSC′s implications

in different models of corporate governance with their different orientated HR-strategies are

pointed out. It is analysed how the HR-strategy emerging due to BSC and changing HRM

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influence shareholder- and stakeholder-orientated companies and to what extent these

different orientated enterprises can adopt these HR-policies. To conclude, the results of the

dissertation are appreciated critically in the final conclusion.

2.

The Balanced Scorecard by Kaplan/Norton

The BSC is a measurement and management system which was developed by Robert S.

Kaplan and David P. Norton in the early 1990es. Its development was the answer to the

increasing criticism on the one-dimensionality of other performance measurement systems,

the focus of which was limited to financial and past figures. For living up to the insisting and

future needs of the information age and to the changing competitive conditions, pure finance-

orientated control mechanisms are inadequate (WEBER/SCHAEFFER 1999: 2ff). Today

companies need controlling systems which include and consider companies′ strategies and

objectives and which are able to measure recent and future business units′ value and

contribution to organizations′ performance. Therefore the BSC complements financial

measures of past performance with non-financial measures of future performance. The aim is

to find a balance between short term and long-term targets, between financial and non-

financial measures, between early and late indicators and internal and external performance

perspectives (SPECKBACHER/BISCHOF 2000: 796). The new perspectives to be

considered are from the point of view of KAPLAN/NORTON the customer, the internal-

business-process and the learning-and-growth perspective, whereby intangible assets as

knowledge, innovation or customer satisfaction are becoming more focused on companies′

strategy. These four perspectives provide the framework for the BSC (1996b: 8f). The

authors emphasize that the choice and the number of the additional drivers is variable and

depends on companies´ vision and strategy as well as their industrial branch and profit

orientation. So KAPLAN/NORTON also underline that the BSC is adaptive for private and

profit-orientated as well as for public and non-profit organisations (1996b: 179f).

2.1.

The BSC as a measurement system

For each above specified perspective, special objectives have to be derived from the strategy.

In addition to this step it is necessary to develop performance measures which are used to

control the degree of target achievement as well as to determine set targets and possible

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initiatives to achieve the strategically set targets. On the whole, management "can now

measure how their business units create value for current and future customers and how they

must enhance internal capabilities and the investments in people, systems, and procedures

necessary to improve future performance" (KAPLAN/NORTON 1996b: 8). Finally, the BSC

provides a framework to translate the strategy into operational terms, as shown in Figure 1.

Figure 1: The four perspectives of the BSC

(KAPLAN/NORTON 1996b: 9)

Figure 1 clarifies that company′s vision and strategy are the central aspects of the BSC

system. They are considered by the four different perspectives, which transform vision and

strategy into operative and measurable figures (KAPLAN/NORTON 1996b: 47ff):

Financial perspective

This perspective indicates the company′s financial success and profitability from the view of

the shareholder. It is shown to what extent the implementation of the BSC and the strategy

make a contribution to the financial performance improvement of the concerning

organisation. Classic indicators related to profitability are for instance operating income,

equity return, return-on-capital-employed or economic value-added as well as rapid sales

growth or generation of cash flow (KAPLAN/NORTON 1996b: 47ff).

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Customer perspective

The customer perspective reflects organisation′s strategic objectives in reference to its

customer and market segments in which the company will compete. These chosen segments

constitute the revenue basis of company′s financial objectives. After identifying and

targeting its market and customer segments, the corporation is able to determine the

individual objectives, measures and initiatives for the chosen segments. KAPLAN/NORTON

determine two different sets of measures. The first set contains the core measures. These are

in general attributes like market share, customer retention, acquisition, satisfaction and

profitability. The other set includes specific drivers and represents customers′ value

propositions, which vary between companies and industries. This set gives information about

what companies have to provide their customers to create the highest possible degree of

loyalty, satisfaction, acquisition, retention and market share. These customer value

propositions can be organised into three categories, which are the product/service attributes

(e.g. functionality, quality and price), customer relationship (e.g. quality of buying

experience and personal relationships) and image and reputation (intangible aspects, which

influence the organisation′s attractiveness for the customer) (1996b: 63ff).

Internal-business-process perspective

This perspective is used by management to identify the critical internal processes which

affect the business strategy and its success in achieving the financial and customer-orientated

aims. "The internal-business-process measures focus on the internal processes that will have

the greatest impact on customer satisfaction and achieving an organization′s financial

objectives" (KAPLAN/NORTON 1996b: 27). This perspective can be illustrated with the

generic value-chain model, where each set of processes creates value for customers and

financial results. KAPLAN/NORTON classify internal processes into three parts. The first part

is the innovation process, which is used for determining customer demands and designing

and developing the requested products and services. Suitable measures are cycle times in

relation to developing and introducing new products, manufacturing process capabilities or

sales percentages of new and old products. In the operation process, the second step within

the value-chain model, the products and services are produced and delivered to the

customers. This process can be measured by cycle times, production flexibility or error rates,

e.g. the final stage is the post-sale service. Here, customer service is offered which includes

warranty and repair activities, treatment of defects and returns or the processing of payments.

Possible measures could be response, reaction or repairing time (1996b: 92ff).

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Learning-and-growth perspective

The last perspective of the BSC develops objectives and measures for the advancement of a

learning and developing organisation. The learning-and-growth perspective constitutes the

basis of the BSC and creates the infrastructure, which is necessary to achieve the individual

objectives of the other perspectives and to realise the business strategy. KAPLAN/NORTON

classify three principal categories for this perspective: employee capabilities, information

systems capabilities and motivation, empowerment and alignment. Management has hence to

invest in employees′ skills and knowledge, enhancing information technology and systems

and aligning organisational procedures and routines. This perspective underlines the

importance of the above specified future investments and emphasizes that HR must be seen

as a source of increasing profitability and achieving long-term growth and objectives.

Employee capabilities can be quantified by employee satisfaction, retention, training and

skills. Real-time availability of accurate, critical internal customer and internal process

information to employees can be seen as measures for information systems capabilities. A

possibility for measuring motivation, empowerment and alignment is the examining of the

number of suggestions per employee or the degree of personal, team and departmental

alignment with strategic objectives (1996b: 126ff).

2.2.

Development and design of the BSC

Developing and designing a BSC can generally occur in seven steps. First of all, a

corporation′s top-management has to clarify and define the company′s global vision and

strategy. After settling on vision and strategy, the different perspectives to be considered

have to be determined. Thirdly, the individual strategic objectives within each perspective are

concretised (KUNZ 2001: 13ff). In step four, a chain of cause-and-effect relationships is

formed, whereby management can analyse to what extent the different targets are in relation

to one another. The aim is to link the different perspectives and individual objectives of the

BSC to realise the consistent business strategy. This occurs with the help of this chain of

cause-and-effect relationships which can be expressed by a sequence of if-then statements.

The result is a strategy which is based on a set of hypotheses about cause-and-effect, which

include all factors of the four perspectives (KAPLAN/NORTON 1996b: 29ff). In this manner

a concept of strategy tracing is developed, which describes the desired development and its

focuses (KÖNIG/REHLING 2002: 6). By questioning different coherences between the

strategic objectives, it is possible to discover weaknesses of the BSC and to revise it

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afterwards. The new framework of linking cause-and-effect relationships is therefore also

called strategy map (BISCHOF/SPECKBACHER 2001a: 49). It specifies the critical

elements and their linkages to business strategy. After the BSC′s implementation,

management is able to identify all strategic elements and measures which create the highest

value for the company and analyse factors′ implications for one another. This strategy map is

always based on a top-down approach, starting with the destination. At the end, this approach

is transferred to a bottom-up-feedback loop. Due to this continuous ascertainment of the

relevant data, it will be possible to determine whether the company is "on the right path" and

in which units it has to intervene (KAPLAN/NORTON 1996b: 149f). Figure 2 illustrates a

demonstrative example of a strategy map.

Figure 2: Example for a cause-and-effect chain based on hypotheses in a strategy map

For evaluating the specified targets and the progress of strategy, measures have to be

identified for all perspectives in step five. It is recommended that the maximum number of

measures should not be more than 25, five to seven for each perspective. Then, target values

are determined, which reflect the aimed value of the measures. These should be orientated to

the next three to five years, with yearly stages of objectives. By the use of the strategy map,

measures, target values, and organisation′s strategy are documented well and easy to

communicate (BORGES/SCHMIDT 2002: 106ff). Finally, initiatives are developed which

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ensure the achievement of the target values. The concept of the BSC is hence also based on a

top-down approach. All objectives and initiatives are consequently derived from business′

global strategy and vision, which are identified by the top-management (KÖNIG/REHLING

2002: 7f).

2.3.

The BSC as a management instrument

In addition to the function as a performance measurement instrument, the BSC has also been

developed as a strategic management system which supports companies′ executives to

manage their strategy over the long-run and achieve their long-term strategic aims. The BSC

is rather the link between developing and implementing a strategy (KAPLAN/NORTON

1996b: 10). Its development let management "introduces four new management processes

that, separately and in combination, contribute to linking long-term strategic objectives with

short-term actions" (KAPLAN/NORTON 1996a: 75). To manage a strategy in the long-run,

four processes are necessary, within the above specified development of the BSC occurs:

Clarifying and translating the vision and strategy

At the beginning the strategic overall planning is set. So the scorecard process starts with

clarifying company′s general vision and strategy for the next three to five years set by its

top-management. Management and executives of all business units come together to gain

consensus about the main objectives of the company. After settling on the business′ vision

and strategy, management determines the different perspectives to be considered and

translates vision and strategy into a set of specific strategic objectives and measures which

will represent the long-term drivers of success. The main BSC is designed

(KAPLAN/NORTON 1996b: 10f).

Communicating and linking

In the next process BSC′s global strategic objectives and measures are communicated

throughout the company. Thus it is ensured that all company employees internalise the global

strategy and understand the strategic objectives which are necessary to realise business′

vision and strategy (KAPLAN/NORTON 1996b: 12). Companies break down the BSC to

several business units and hence link the global strategy to departmental and individual

objectives and measures. Using the corporate scorecard as a template, each business unit

translates its strategy into its own scorecard. So many different individual BSCs can be

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developed within the company, and by doing this each department or individual sets goals

which have to be achieved. Aim of this process is to define and measure the respective

strategy contribution of each business unit (BORGES/SCHMIDT 2002: 116). Hence it is

possible to implement an incentive system by aligning the global objectives with individual

objectives, which links rewards to the unique performance measures of each department or

employee (KAPLAN/NORTON 1996a: 79f).

Planning and target setting

"Developing your Balanced Scorecard provides an excellent opportunity to tie resource

allocation and strategy together" (NIVEN 2003: 20). So the integration of the BSC in the

annual planning and budgeting process occurs. On the one hand, business has now to

quantify the long-term outcomes it wishes to achieve. Otherwise also short-term target values

are quantified for the measures on the scorecard which have to be accomplished by every

business unit (KAPLAN/NORTON 1996b: 195f). At this point, the allocation of company′s

resources occurs through the focus of financial and material inputs on the strategy. Also,

possible initiatives are identified and coordinated to achieve the long-term strategic

objectives, in the case of defaulting the requirements (KAPLAN/NORTON 1996a: 84).

Strategic feedback and learning

This process is considered as the most important and innovative part of the BSC. It gives

companies the capacity as a strategic learning framework through continuous feedback and

learning. The BSC enables a consistent inspection of the chosen strategy through the regular

estimation of the target achievement by the departments or individual employees

(KAPLAN/NORTON 1996a: 77). Now, especially the strategy map is spotlighted. With the

chain of cause-and-effect relationships and the integration of measures, target sets and

essentially achieved results, management has the ability to check whether the formulated

strategy is working, and if not, why. It is hence possible to discover its weaknesses and the

units with needs of improvement. The preceding top-down approach of the BSC is here

transferred to the bottom-up-feedback loop. Finally improvement and learning processes can

be implemented by the management (KAPLAN/NORTON 1996a: 84f).

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3.

The BSC and its implications for human resource management

The implementation of the BSC has large-scale implications for HR and their processes in

the implementing company. By the use of it, intangible assets like human capital become

more important and considered in the strategic reorientation of corporations′ objectives

(LICHTENSTEINER 2000: 4f). The BSC is used as a controlling and management instrument

for linking HR-processes to corporation′s objectives on team and individual level and as a

target agreement instrument for all employees (DAHMEN et al. 2000: 19f). Furthermore, it is

up to HRM to support top-management with the implementation of the BSC, which will be

shown in the further course of the thesis. All these facts indicate that the BSC offers the

opportunity of a better positioning of HRM. Especially, the comprehension of the learning-

and-growth perspective shows the early involvement of the HR-department. And the fact

that all other perspectives are based on the learning-and-growth perspective underlines the

significance of HRM and HR-processes (KÖNIG/REHLING 2002: 11f).

Therefore, the aim of this chapter is to point out the above specified importance of HRM and

the BSC and the implications they have for one another. The learning-and-growth

perspective is investigated referable to its consideration of HR-aspects and measurements.

Accordingly, critical analyses on the application of the BSC and its contribution to HRM

and vice versa are given. The author will summarize risks and opportunities of the BSC′s

adoption in HRM and their consequences.

3.1.

The learning-and-growth perspective

The significance of this perspective is underlined by the following quotation by

KAPLAN/NORTON: "The objectives in the learning-and-growth perspective provide the

infrastructure to enable ambitious objectives in the other three perspectives to be achieved"

(1996b: 126). With the help of this perspective it is possible to allow for intangible assets

like customer and worker satisfaction, which are especially playing an important role in the

service industry (KAPLAN/NORTON 1996b: 2f). Furthermore, Kaplan/Norton differentiate

between three different conditions for achieving the other perspectives′ objectives. These are

employee capabilities, information system capabilities for an unproblematic communication

and finally employee and unit motivation, alignment and empowerment on business

objectives (LICHTENSTEINER 2000: 5f). This perspective is hence the basis for the other

perspectives, because it is the learning-and-growth perspective′s function and support to

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accomplish the before named preconditions for target agreement of the other perspectives

(KAPLAN/NORTON 1996b: 28f).

3.1.1. Development and measurements of this perspective

KAPLAN/NORTON differentiate between core employee measures and objectives and

situation-specific drivers of learning-and-growth. Both form the learning-and-growth

measurement framework, which is designed by the method of a cause-and-effect relationship

chain and the following strategy map (1996b: 129).

Figure 3: The Learning-and-growth Measurement Framework

(KAPLAN/NORTON 1996b: 129)

Core employee measurement group

Employee satisfaction, employee retention and employee productivity are part of this group of

core measurements.

Kaplan/Norton see employee satisfaction as the condition for the other two. Employee

morale is seen as the essential factor of success by many companies. "Satisfied employees

are a precondition for increasing productivity, responsiveness, quality and customer service"

(KAPLAN/NORTON 1996b: 130). Employee satisfaction is typically measured with surveys

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and evaluated on the basis of the following indicators (KAPLAN/NORTON 1996b: 130):

- involvement with decisions

- recognition for doing a good job

- access to sufficient information to do the job well

- active encouragement for creativity and initiative

- support level from staff functions

- overall satisfaction with company

Aim of employee retention is to link the employees to the company for a preferably long

time. A loss of an employee, who enjoyed company′s qualifying and training in specific

skills, would be a big loss of intellectual capability for the organisation. So, the labour

turnover rate is usually used as a reliable indicator (KAPLAN/NORTON 1996b: 131).

Employee productivity shows the employee revenue and is calculated from the output per

employee. So, the simplest way of measuring is revenue per employee. Further useful

evaluation possibilities are volume of sales per employee or value-added per employee and

finally the measurement of the denominator by employee compensation of all employees

(KAPLAN/NORTON 1996b: 131f).

Situation-specific drivers of learning-and-growth

These enablers are necessary to make use of the superior measurements and to achieve the

employee-orientated targets in the core employee measurement group. KAPLAN/NORTON

identified as enablers staff competencies, technology infrastructure and climate for action

(1996b: 129f).

Staff competencies describe the qualification and skills of the work force. This driver obtains

on employees′ skills and the need for reskilling the work force to match their qualification

with the actual and future challenges. A useful figure for measuring the need for reskilling is

the strategic job coverage ratio, which assesses the current availability of strategic qualified

staff relative to anticipated needs as well as the position and dimension of this gap

(KAPLAN/NORTON 1996b: 132f).

Technology infrastructure measures the capabilities of company′s information system. This

capability can be measured by the information coverage ratio. Similar to the strategic job

coverage ratio, the information coverage ratio measures the proportion between the required

information and the already existing information, which are necessary to realise these tasks

(KAPLAN/NORTON 1996b: 134f).

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A good climate for action is characterised by staff motivation, alignment and empowerment.

For influencing positively the climate for action, following drivers are recommended

(KAPLAN/NORTON 1996b: 136ff):

- measures of suggestions made and implemented, which identify the ratio of motivation

- measures of improvement, which indicate the readiness to achieve aimed targets

- measures of individual and organisational alignment, which show the consistency between

individual objectives and the ones of the global BSC

- measures of team performance, which assesses team building and their performance.

Altogether, employee measures and objectives are the result of activities regarding the

situation-specific drivers, which are the basis of the whole concept of the BSC and the

preconditions for achieving the individual targets in the other perspectives and to realise

company′s financial success. Especially the last fact is covered by Appelbaum′s perception

of a positive relation between workers′ motivation and qualification and corporate

performance. Human resources play more and more the key role for a successful realisation

of business strategy and financial success (APPELBAUM et al. 2000: 7f).

3.1.2. Quality of measures and drivers

To evaluate the quality by use of the ratios and drivers used in the learning-and-growth

perspective, first of all it is necessary to clarify the requirements for measures′ quality.

According to EHRMANN, figures have to accomplish following requirements (2002: S.54):

1. figures′ aim must be clear

2. figures have to be easily structured and comprehensible

3. manageable amount of figures

4. figures have to be current

5. identification of figures has to be economical and efficient.

Employee satisfaction has a significant correlation with companies′ revenue. This can be

confirmed by several studies which analysed the functional chain between employee and

customer satisfaction and company′s profitability. Employee satisfaction has a directly

positive influence on customer satisfaction (WINTER 2005: 68). It follows a positive

influence of customer satisfaction on company′s success, which is also proven by several

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studies (WINTER 2005: 58). A positive correlation between the BSC and employee

satisfaction is noticeable and verified by HORVÁTH&PARTNER GMBH′s survey of 100

German, Austrian and Swiss companies about the BSC. More than 60 % of asked companies

see a positive influence of the BSC regarding employee satisfaction (2004: 5). Problems can

arise from the ambiguous definition of the term employee satisfaction and the use of many

subfigures. This can result in a high cost of survey.

Employee retention is usually measured by labour turnover which is easy to measure. But

this ratio alone does not necessarily implicate a loyal relationship between employees and

company. Further, useful ratios to evaluate loyalty could also be the amount of worked

overtime or absent days.

The identification of employee productivity is already critically scrutinised by Kaplan/Norton

themselves. When measuring the volume of sales per employee, the costs associated with the

volume of sales are not considered (KAPLAN/NORTON 1996b: 131). But in general, the

chosen ratios should be easy to measure.

Staff competencies and technological infrastructure are also easy to determine. When

companies already know their strategy and the required resources, it should not be a problem

to determine these drivers using a target-performance comparison. But the more detailed the

desired information on the capabilities, the higher could be the amount of figures. Finally,

this could result in higher costs of the survey.

First problems of measuring climate for work arise already from the ambiguous definition of

this term. Kaplan/Norton try to circumscribe and determine this figure by using several

subfigures. But this heterogeneity can also result in a high amount of figures and higher

economical effort of measuring. An unclear definition and the high costs of survey prevent

this ratio from meeting the requirements for measures′ quality.

Altogether, it is apparent that the quality of the chosen figures only inadequately meets the

requirements. The aim of each figure is clear, so that specification 1 is satisfied. But the other

requirements are only partially accomplished. Especially drivers like employee satisfaction

and climate for action are not that comprehensible. They are difficult to determine and their

survey is possibly not economical. Staff competencies and technological capabilities are

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indeed easily structured, but their measuring is also associated with a high economical effort.

So, the quality of the chosen figures is not given.

3.1.3. Critical evaluation

The learning-and-growth perspective is of particular importance in Kaplan/Norton′s concept

of the BSC. This is because of its significance as the basis of all other used perspectives and

its importance for the workforce, which becomes increasingly the key for a corporation′s

success (KAPLAN/NORTON 1996b: 126f). This aspect also underlines the view of

APPELBAUM et al., who see in a long-term orientated HR-strategy of employment relations

the key for companies′ profitability (2000: 7f). So, the approach of Kaplan/Norton and their

choice of the learning-and-growth perspective -with its long-term orientated employment

strategy- as the basis of their BSC concept also support the so called stakeholder view of

corporate governance, which pursues long-term orientated employment relations with low

turn over, long-term employment and investments in training and employees′ skills. The

BSC offers an innovative instrumental basis for this stakeholder-management, here in terms

of employees (SPECKBACHER/BISCHOF 2000: 799). Kaplan/Norton share hence the

opinion of BING et al. that "intellectual capital is the lifeblood of the organization" and that

intangible assets like human capital are increasingly becoming one of the main competitive

advantages and the source of organisations′ valorisation (2003: 344).

But in practice, the aim of Kaplan/Norton′s theory of a higher weighing of intangible assets

and meaning of employees as stakeholders is not observable. In their study about the use of

the BSC in 100 German DAX-companies, SPECKBACHER/BISCHOF qualify this approach.

The majority of the companies asked gives the least importance to the possible BSC′s

benefits "advancement of intangible assets" and "stronger consideration of stakeholder".

Further, even one third of the interviewed organisations designed their BSC without the

learning-and-growth perspective (2000: 805ff). In HORVÀTH&PARTNER GMBH′s study

more than half of the participating companies arrived at the conclusion that the BSC has no

positive effect on labour turnover (2004: 5).

The reasons for the negative behaviour and application in practice could be the cause-and-

effect difficulty and complexity of the strategy map to be developed. It seems to be difficult

to objectify the intangible assets or also so called "soft" figures like employee satisfaction,

climate for action, leadership skills or communication, and to make the connection to other

ratios within the cause-and-effect chain. This problem is also shown by the survey of

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HORVÀTH&PARTNER GMBH. More than two thirds of the companies asked especially see

difficulties in the insufficient measuring of the "soft" figures (2004: 22). Finally, it can be

concluded that the significance of the learning-and-growth perspective differs in practice and

theory.

3.2.

Analysis of the relationship between HRM and the BSC

The development and implementation of a scorecard has extensive and shifting consequences

for HRM and companies′ HR-policies. On the other side the BSC is dependent on the

support from HRM for a successful and complete implementation. So, in the following part

these relationships and implications between HRM and BSC are pointed out and critically

reviewed.

3.2.1. Contribution of HRM to the BSC

The following paragraph analyses to what extent human capital and HRM make a

contribution to the development and implementation of the BSC within a company. All in

one, following contributions of HRM can be pointed out (KUNZ 2001: 54 ff and

KÖNIG/REHLING 2002: 11f):

- service for creating the BSC

- coaching for implementing the BSC

- development of own functional HR-scorecards

- achievement of objectives through chosen actions

Service for creating the Top-BSC

The HR-department can be seen as the pulser of the whole development and strategic

reorientation of the organisation. Without HRM′s know how and information, it is hardly

possible to define perspectives, goals, measures and initiatives within the process of the

BSC-development. Further, HRM also has to make a contribution to the following strategic

themes (KUNZ 2001: 55ff):

-

strategies for covering demand of employees

- strategies for recruiting and training qualified workers

- composition of incentives and compensation strategies

- strategies for developing corporate culture

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- evaluation of necessary communication and qualification

measures for realising the new strategies

- antecedent of trans-sectoral cooperation

- evaluation of the accruing costs within the HR-department

Coaching for implementing the BSC

HRM should assume the function of an internal advisor within the development of the BSC

and attend to top-management in respect of implementing, communicating and realising the

BSC (KÖNIG/REHLING 2002: 11). This necessity results from HRM′s knowledge about the

key personalities and internal customers which are necessary for developing and realising the

BSC. Further, internal HRM is best informed about the capacities and qualifications of

existing HR, so that realistic objectives can be set. And finally, HRM controls the incentive

and compensations systems which should be connected to the BSC (KUNZ 2001: 56f).

Development of own functional HR-scorecards

Within the development and implementation of the Top-BSC, it is useful to break down the

global BSC to different units of the company. So it makes also sense to create an own

scorecard for the HR-department or individual employees (KUNZ 2001: 58ff). To design

these own functional scorecards, the same conceptual procedure is used as for the developing

the Top-BSC (see paragraph 2.2.). Especially the fact that the performance of HR-

departments and the economical use of personnel activities are difficult to measure

underlines the necessity of own HR-scorecards within HRM. For analysing the efficiency of

the HR-department, operating figures seem to be a meaningful and important instrument. So

it would be possible to analyse different personnel activities (TONNESEN 2002: 91).

Achievement of objectives through chosen actions

Different action programmes are necessary to achieve the given targets, which have to be

implemented by HRM. These are particularly activities on HR-recruiting, -integration and -

development, leadership-development, analysis of HR-potential and -activities on the

development of a climate for action and of employee satisfaction (KUNZ 2001: 75ff).

Especially in times of strategic reorganisation, qualified and satisfied employees as well as a

good working climate for action are absolutely necessary to reduce workers existential fears

and to ensure the success of organisational change.

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3.2.2. Critical evaluation ­ opportunities and risks

HRM makes a central contribution to the development of the BSC. Without its know-how

and its support in data collection, supervision of internal customers, provision of information,

service and coaching, it would hardly be possible to realise the concept of the BSC and to

achieve the given objectives. This task is one of the essential factors for success in the BSC

implementation process. Therefore, HRM acquires an absolutely high significance within the

company.

Especially, breaking down the BSC into individual units of employees and the designing of

individual HR-scorecards seem to be one of the key roles within the BSC concept. Through

individual systems of incentives and individual achievement of objectives, it is necessarily

possible to gain superior targets. In this context, teamwork has to be enabled, wherefore

TONNESEN recommends to link employees′ individual targets also to team targets, i.e.

individual targets are only achieved if the team objective has also been realised (2002: 105).

KAPLAN/NORTON even suggest focusing only on a few critical employees and "job-

families" which have the most important influence on organisation′s strategy. All other

employees should be disregarded within the BSC concept. Reasons are e.g. lower costs and

an easier implementation of the BSC (2004: 225ff).

One of the most critical points of HRM′s contribution to the BSC is the provision of useful

measures. "Hard figures" like labour turn over, qualifications or the proportion of women are

easy to determine. But, as already mentioned, it seems to be difficult to measure the so called

"soft" figures like employee satisfaction, promotion of exchange of experiences or team-

learning, which can partially only be collected by surveys. This is combined with high efforts

and costs. Further, there could always be the possibility of deviations and surveying wrong

information material, which could negatively influence the process of the BSC in respect of

identifying strategy, target values and initiatives. But also in this point, opinions differ.

TONNESEN sees only few problems in collecting the data of "soft" figures, but more

problems in linking them and establishing a connection (2002: 93f). This opinion is also

shared by Kunz who supports the consideration of "soft" figures and who negates the

difficulty of their survey. In contrast, LICHTENSTEINER and KÖNIG/REHLING especially

emphasize these difficulties in collecting these data due to errors of measurement. They

underline this aspect as one of the biggest risks within the implementation process of the

BSC (2000: 10 and 2002: 12f).

Altogether, HRM in its function as the provider of information and service plays an

important role in the implementation process of the BSC and hold its dear. But especially due

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to costs and effort of the survey of "soft" figures and possible errors of measurement, it is

arguable, if the feasibility and convenience of the BSC are still warranted. Therefore, when

choosing the measures, the use and necessity of "soft" figures should exactly be considered

because of the threat of an ex-post falsified BSC concept.

3.2.3. Contribution of the BSC to HRM

The BSC has many consequences for HRM and company′s human capital. In the following,

specific opportunities in BSC′s support of HRM are pointed out and analysed. In addition to

the three central HR-aspects of the BSC, "alignment of strategy on HRM", "agreement on

objectives" and "linkage with incentive system", which are emphasised by Kaplan/Norton

(BISCHOF/SPECKBACHER 2001b: 10ff), more important HR-aspects can be identified and

discussed.

Alignment of strategy on HRM and BSC′s contribution to communication and transparency

It is very important for Kaplan/Norton that all employees and member of management

conceive the given strategy and activities which are necessary to achieve the objectives. To

attain a high value added, the human capital has to be orientated on this given strategy. With

support of the strategy map and its hypotheses, it is possible to analyse the internal customer

processes and to align HR with the strategy. Strategic gaps in competence can be identified,

why HR-development-programmes could be defined and the HR-performance increased

(KAPLAN/NORTON 2004: 242). The basis for this unique HR-orientation on business

strategy and the understanding of the BSC are seen in a continuous process of

communication and information (KAPLAN/NORTON 1996b: 200). The development of the

BSC increases the trans-sectoral dialog between management and human resources along the

value added chain. Chances of economies of scope, friction losses and conflicts can be

identified (KUNZ 2001: 101 and KAPLAN/NORTON 1996b: 302f). The guarantee of

comprehensive information and communication is seen as one of the factors for success of

the implementation, which is why KUNZ recommends special workshops to enable the

necessary communication between management and employees (2001: 99).

The empirical study of HORVÁT&PARTNER GMBH supports these views. "Support in a

successful realisation strategy" and "a better communication of strategy" as well as the

"creation of a unique orientation of strategy" are stated each by more than 90 percent of the

companies asked as reasons for the implementation of the BSC (2004: 6). Further, almost

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80% were satisfied with the BSC′s support in communication and contents of information

and target achievement and saw an essential improvement of organisation′s communication

and information processes (2004: 17). But it is remarkable that the use of strategy maps is

not continuously common. More than one third of the questioned organisations pass on it,

whereas it is more remarkable that so many companies improved their communication

without this important component of the BSC (2004: 11).

One more essential benefit of the BSC is the transparency generated by communication,

which is also empirical shown by Gilles (KUNZ 2001: 113). Through shared development of

the strategy map, employees obtain a clearer understanding of their job. This can support

motivation and result in a better value-based management (KUNZ 2001: 34). Corporate

strategy as a secret business of the management is a thing of the past. Furthermore, the BSC

also reveals HR-departments structure, processes and costs (KÖNIG/REHLING 2002: 20).

Thus, the BSC makes an essential contribution to discover savings and improvement

potentials within HR-processes.

But transparency can also have negative aspects. Too much transparency can result in

employees and management feeling monitored and too much controlled by their superiors.

Especially one-way transparency can increase this feeling. A further argument against too

much transparency is the danger of information on the corporate strategy becoming known to

competitors) (KAPLAN/NORTON 1996b: 148ff). Therefore, the BSC requests for a high

degree of trust. Its implementation can accordingly be seen as a signal of trust to employees.

Agreement on objectives

Targets have a multifaceted control function to realise a productive added value and to

activate hidden benefit potentials. Further, a close connection between company′s global

strategy, BSC and team-orientated or rather individual performance contributions is one

essential requirement for a sustainable success in the implementation of the management

system (SPECKBACHER/BISCHOF 2000: 797f). Because of this, the BSC runs the risk to

be without sustainable success, if motivating initiatives like target setting and incentive

systems are disregarded. Therefore, agreements on objectives are an useful instrument to

concretize given objectives on all enterprise levels to support organisation′s market- and

customer-orientated development (KUNZ 2001: 108). An active participation through this

process of agreement can result in additional positive motivation effects. They alleviate

employees self-controlling. Employee leadership is not getting dispensable; on the contrary it

is up to the executive to perform a controlling and coordinating function. They have to verify

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the BSC according to specific and deferred targets and how far agreements on objectives

comply with trans-sectoral requirements (KUNZ 2001: 143f).

But also problems arise from the process of agreement on objectives. The development of the

Top-BSC and the global business strategy can implicate limited clearance in relation to

individual agreements on objectives. Aims and target values can decrease the margin for

agreements on objectives with individual employees. So, the motivation effect through

participation can potentially be lost, if the agreement on objectives is already given through

the global strategy and its target values (KÖNIG/REHLING 2002: 19ff).

But in practice, the recommended agreements on objectives can not always be noticed.

SPECKBACHE/BISCHOF′s evaluation of the BSC shows that agreement on objectives

occurs primarily on the enterprise levels of top- and middle-management. Only three percent

of the companies asked agreed on objectives with individual employees (2000: 808).

However, this behaviour can be qualified by HORVÀTH&PARTNER GMBH′s study. They

analysed that almost 40 percent of the companies asked agree on objectives with individual

employees on basis of the BSC, which is admittedly still a low value. The difference can be

attributed to the triennial distance between both studies and the involved advanced

development and distribution of the BSC in the German companies. This supports the fact

that the use of the BSC and its HR-elements becomes increasingly popular. But furthermore,

the use of agreement on objectives with top- and middle-management is affirmed. More than

70 percent agree on targets on basis of the BSC with their executives (2004: 20f).

Compensation and incentive systems

A further advantage of the BSC consists in its possibility for a performance-orientated

incentive- and compensation-controlling. KAPLAN/NORTON demand the linkage of BSC′s

objectives to an incentive system and variable compensation (1996b: 193). BSC-based

incentive systems and variable compensation represent an essential factor for success

(SCHWERTNER 2005: 1). Through linking them to strategic objectives, they can

systematically focus performance on strategy implementation. But KAPLAN/NORTON

emphasize that this step should only occur, when qualification and communication processes

are already established to guarantee that employees understand the given strategy which is

necessary to reach the targets (1996b: 193). Then employees should be motivated by a

system of incentives. This is also verified by Schwertner′s study "Best Practice

Anreizsysteme" about incentive systems. More than 90% of participating organisations used

incentive systems and variable compensation, 94% of these companies saw these factors as

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very useful to motivate employees and as a successful and indispensable method for strategy

implementation. Furthermore, SCHWERTNER shows that the level of satisfaction with BSC-

based incentive systems is essential higher than with "other" incentive systems. 96% of

asked companies saw a positive impact of BSC-based incentive systems compared to 68%

with conventional incentive systems (2005: 2f). Compensation adapted to BSC′s objectives

guarantees that a value adding behaviour of employees regarding the BSC is supported by

monetary and non-monetary motivational aspects. Two essential advantages occur:

management compensation can be orientated on long term measures. Short-term orientated

financial measures drop and management receives the possibility to make more risky

decisions. Further, "Kaplan and Norton believe that employing the balanced scorecard leads

to new business processes that can be used to link long-term strategies to short-term

decisions" (DEBUSK/CRABTREE. 2006: 45).

But opinions differ regarding the enterprise level in which an incentive system should be

implemented. BISCHOF/SPECKBACHER draw the conclusion that positive effects of an

incentive system decrease with lower levels of hierarchy, whereas negative risks increase.

Top-management′s performance incentives should be orientated on long-term performance

measures (2001b: 15). It is up to the management to allege and decide targets, whereas it

would be very dysfunctional to agree on short-term orientated objectives. This would risk

that the management′s attention is only focused on those variables which realise short-term

results and increase their compensation. Remaining variables would be tried to be ignored

even though they are also linked to the business strategy. The company′s long-term

orientation would be disregarded (DEBUSK/CRABTREE. 2006: 47f). For employees in lower

enterprise levels, superior financial measures are rather unusable to evaluate and compensate

their performance. They have only minimal influence on these figures, wherefore short-term

orientated targets are more useful for this company′s part of workforce. Individual target

settings are recommended, as already emphasized by Kaplan/Norton, to guarantee a fair

incentive and variable compensation system. One further disadvantage of this approach is the

danger of unfair compensation. Choosing wrong or unqualified figures can have negative

consequences on the employee′s compensation. Objectives could possibly never be achieved

(BISCHOF/SPECKBACHER 2001a: 53f). This view is also underlined by

KÖNIG/REHLING. They also demand that the linkage of target setting to a compensation

system should only occur, if the achievement of objectives is generally possible and the

employees′ influence is sufficient and warranted (2002: 12).

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Certainty of decision

The BSC enables employees to get an orientation on clear defined milestones. Especially in

times of organisational change, the BSC can communicate perspectives and guidelines of the

organisation′s development (KUNZ 2001: 37ff). Also management benefits from these

guidelines. Particularly, it is easier to rely on the BSC, when legitimising planned initiatives,

strategic activities or reallocation of resources (KÖNIG/REHLING 2002: 19). So, the BSC

offers general conditions within which employees and management can affect certainly. But

this certainty can also become risky for the organisation, when developing certain inactivity

for this reason. Only a current certainty should occur from these milestones, objectives and

figures, because of the necessity of continuous adaptation. Further, management could feel in

wrong certainty.

Teamwork and ­development

One further strength of the BSC is that teams and departments are forced to work holistically

and to add value. This reduces individual orientated practices (KUNZ 2001: 100f). This

succeeds if team members know the coherency between their objectives and that of company.

Linking these targets to the compensation system can result in the incentive to accomplish

dutiful the target specifications. But individual orientated objectives have the risk that team

orientation is becoming disregarded. So, KUNZ suggests to devise team orientated targets

and to substitute them for individual objectives (2001: 211). But disadvantageous could be

the fact that team objectives are always associated with the risk of free-rider behaviour. But

this risk can be prevented with monetary incentives and TONNESEN′s approach to link

individual targets to team objectives (see paragraph 3.2.2.).

Appreciation of HRM

The BSC has accomplished not to focus organisation′s strategy exclusively on financial

measures, wherefrom especially HRM can benefit. In Kaplan/Norton′s concept of the BSC

the learning-and-growth perspective, with its implications of employees and HRM, plays one

of the key roles within the process of the BSC. This is especially underlined through its

position as the basis for all other perspectives and the above specified necessary support of

HRM for the implementation process of the BSC. According to Kaplan/Norton, HRM gains

in importance through the BSC, which is still though not verified in practice (see paragraph

3.1.).

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Performance appraisal and potential analysis

The BSC offers a strategic framework to concretise core elements as well as different key

targets of unique business units through measurement and factors for success. It is up to the

BSC to describe future challenges of business development and target setting (KUNZ 2001:

144ff). Especially with the help of the learning-and-growth perspective essential strategic

intensions and factors for success for continuous development, innovation, creativity and

higher flexibility of adaptation can be pointed out. Potential analyses tend to discover current

HR capabilities, respecting strengths and weaknesses (see paragraph 3.1.). On this basis it is

possible to create new HR advancement and training programs (KUNZ 2001: 185f). Besides

already mentioned financial and non-financial measurements, one further essential method

to evaluate performance and potential is the so called 360-degree-feedback. In this context

employee behaviour and performance is rated by colleagues, employees, superiors and even

customers (KUNZ 2001: 187f). Furthermore, through the BSC it is possible to directly

measure HR-performance when choosing suitable figures. TONNESEN assumes that, with

the use of the operating cash flow of HRM, it is possible to measure directly HRM′s

performance and contribution to companies′ shareholder value (2002: 152).

3.2.4. Critical evaluation ­ opportunities and risks

The consequent application of the BSC attains that competence, motivation, advancement

and team-playing of employees become the centre of organisation′s strategic activities. It

offers the possibility of a better positioning of HRM within the organisation. It strengthens

personnel work in a manifold way and effects a consequent alignment on strategy.

Certainty of decision and involved legitimateness of planned initiatives can be seen as an

advantage for all employees on all enterprise levels. The criticism on wrong certainty affects

rather the overall concept. It has only indirect consequences for the individual HR.

An essential strength can be seen in the management′s and employees′ motivation effect of

the BSC. Higher motivation occurs through the BSC′s contribution to alignment on strategy,

agreement on objectives and incentive and variable compensation as well as through intrinsic

elements like intensive communication, transparency and integration into the development

process systems (KÖNIG/REHLING 2002: 4). KUNZ underlines that the incorporation of HR

as responsible participants in strategic decisions endows sense- and value-orientated

potentials (2001: 101). Workers identify themselves more strongly with the strategy and

realise it more successfully when incorporated into the breaking down and communicating

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process. This is verified by several studies, which differ though in the degree of participation

(see paragraph 3.2.2.).

But in all cases, it is up to the companies to use these beneficial opportunities. Deficiencies

in implementation of agreement on objectives and BSC-based incentive systems give reason

to this conclusion. It is shown by SCHWERTNER and DEBUSK/CRABTREE that if

agreements on objectives and BSC-based compensation systems are introduced, they make

definitely an important contribution to motivation and to sustainable business success and

result in a high degree of satisfaction of the companies using it (2005: 2f and 2006: 47f).

Both processes support HR to operationalise business strategy and correlate positively with

individual and involved business performance. Admittedly, practice shows an essential dread

to the general use of agreements on objectives and incentive systems.

HORVÁTH&PARTNER GMBH analysed that about half of the companies asked do their

BSC without linked compensation and incentive systems or agreements on objectives (2004:

20f). Agreements on objectives are more common on top-management levels. On the one

hand, this can result from constraints in evolvement through specified target setting.

Otherwise problems occur through incentive-based conflicts of interests and attaining

individual targets by the top-management. BSC-based incentive and compensation systems

still offer several chinks. Motivation through a linked compensation system and agreement

on objectives can hence be seen as one of the main criticisms of the BSC-concept. There is

still need for action and improvements to alleviate the implementation of these elements. But

again it is necessary to underline that if the implementation of BSC-based compensation

systems and agreements on objectives is successful, companies will benefit and improve their

performance. "Most of the organizations (88%) regularly using the BSC reported

improvements in operating performance, and 66% of them also reported an increase in

profits" (DEBUSK/CRABTREE 2006: 46).

Furthermore, the alignment of strategy on HRM and the involved communication processes

make an important contribution to the understanding and operationalisation of strategy by

HR as well to the increase in the strategic human capital attendance. This active involvement

results in high motivation effects to employees. Participation and communication processes

are therefore an important aspect of the BSC and stimulate transparency. On the first view, a

high degree of transparency can be seen as a strength of the BSC. Here it is also questioned,

how this transparency is to be understood and realised. One-way transparency can be

misused as a controlling system; too much transparency can result in information on the

corporate strategy becoming known to competitors. Still open is the question, why so many

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companies were satisfied with their improved communication and strategy alignment

processes without implementing a strategy map which is recommended by several

researchers as a necessary element to improve these workflows.

Summarised, the BSC makes an essential contribution to HRM. It supports HRM to discover

hidden potentials and to evaluate HR-performance, and it enhances HRM′s significance. By

complete implementation of the BSC and consideration of all necessary and recommended

elements, companies can benefit to a great extent through advanced strategic and HR-

orientated elements which result in an improvement of business performance. Deficits and

problems can occur through partial implementation processes of the BSC, which is also

shown by DEBSUK/CRABTREE. In their study they found out that even 70% of BSC

implementations failed. They attribute this to the irregular and not complete application of

the BSC as recommended by Kaplan/Norton (2006: 46f).

4.

The BSC and its implications in high-performance-work-systems and models of

corporate governance

The BSC influence strongly HR-process and -strategy of companies. Through their study

about the BSC and its influence on HRM BECKER et al. verified that the BSC accomplishes

all premises and functions of so called High-Performance-Work-Systems (HPWS) (2001:

7ff). HPWS are defined as an instrument with which "each element of the HR system is

designed to maximize the overall quality of human capital throughout the organization"

(BECKER et al. 2001: 13). Hence, core elements are work organisation by delegating

frontline workers with more authorisation relative to decision-making, use of self-managed

work teams, compensation and performance management policies that attract, retain and

motivate employees as well as investments in employees′ firm-specific skills by providing

concurrently employment security (APPELBAUM et al. 2000: 5ff and BECKER et al. 2001:

13f). The implementation of the BSC with its consideration of the learning-and-growth

perspective results in an integrated HPWS and thus pursues a long-term orientated HR-

strategy, as shown in chapter three. At this point it is necessary to scrutinise to what extent

the BSC and the integrated HPWS have an impact on different models of corporate

governance with their different orientated HR-strategies and if they can be successfully

implemented.

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4.1.

Models of corporate governance and its implication in HR-strategies

Corporate governance1 systems differ especially from the unequal role of shareholders and

stakeholders, wherefore the distinction between the shareholder- and the stakeholder-model

of corporate governance exists (SCHMIDT/WEISS 2003: 1f). The shareholder-model

dominates especially in the Anglo-American environment thus in countries like the US or

UK, while the stakeholder-model is more common in continental Europe -particularly in

Germany- or Japan. The main objective of shareholder-orientated organizations is the

maximization of shareholder value, whereas the primary goal of stakeholder-orientated

companies is to balance the interests of different stakeholder groups, such as investors,

employees, suppliers, customers and managers (VITOLS 2001: 337). These differences in

objectives result from differences in corporations′ ownership. Companies in the shareholder-

model are in widespread shareholdings by many private individuals, whereas stakeholder-

orientated corporations are more in concentrated ownership by one or more large

shareholders with a strategic motivation for the ownership like other enterprises, financial

institutions or the public sector (KAY/SILBERSTONE 1995: 87f). Further, the shareholder-

model is denoted by its short-term orientation. Companies are more under pressure to

achieve short-term profitability and increase share prices. Therefore most corporations make

short-term decisions and follow a short-term market strategy (VITOLS 2001: 345ff). In

contrast, companies in the stakeholder-model are more long-term orientated. Organisations

are rather in concentrated and reciprocal ownership, objectives and profitability are long-term

orientated. They set value on corporations′ growth, development and market share to

persecute the interests of all stakeholder groups without having preferences for any particular

one (KAY/SILBERSTONE 1995: 88f and VITOLS 2001: 345 - 352).

These main differences have consequently an important impact on companies′ HR-policies .

Stakeholder-model companies have centralised long-term organisation orientated

employment relations. They pursue a resource-based approach, meaning long-term

employment, low turn over, security-based and collective payment, and high investments in

training and employees′ skills (BING et al. 2003: 344). The aim is to build up firm-specific

human capital and to develop own highly qualified talents. Labour is more seen as a source

of competitive advantage than a cost burden, which results in long-run HR investments in

1 Corporate governance is a matter of who owns the rights and the authority to make and

influence companies′ decisions, which objectives are aligned and how it is controlled

whether executed decisions are good ones (SCHMIDT/WEISS 2003: 1).

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those enterprises (VITOLS 2001: 351f and WEVER 1995: 609). These approaches even

dispose of all elements of the above specified HPWS. Especially in Germany, long-term

orientated HR-policies are supported through the institutional framework, high job protection

and unionization (WEVER 1995: 1ff). Further, companies have stable and long-term

relationships with their investors, wherefore a longer strategic time horizon is promoted for

them. Profitability and return materialise in the medium- or long-run, which is why pressure

for short-term success and entering new markets is low (VITOLS 2001: 352). All these facts

underline and substantiate the long-term orientated HR-strategy in stakeholder-orientated

corporations.

HR-strategies of shareholder-orientated companies are in contrast more short-term orientated.

For instance, in US co-determination of workers is low. Less job protection makes it easier

for US enterprises to hire and fire employees rapidly. Wage compensation is characterized by

performance-based payment (WEVER 1995: 607f). Another reason for a more short-term

orientated HR-strategy is that they are more under pressure to offer short-term profitability to

their investors. They have to move quickly into new markets and to respond to market

changes by rapid and flexible organizational restructuring. So, these companies have to

pursue competitive strategies that minimize their dependence on human resources, rather

than enhancing employee influence and managerial decision making (WEVER 1995: 609).

All this results in that corporations follow market-orientated employment relations with

shorter job durations, higher turn over, individual and performance-based payment and less

investments in training firm-specific human capital. Labour is not seen as a long-term

investment rather than as a cost-cutting alternative to stay competitive and to present

financial performance to the shareholders (BECKER et al. 2001: 14f and JACOBY 2004: 8ff).

4.2.

Impact and implications of the BSC in companies with short-term and long-term

orientated HR-policies

The BSC offers an innovative basis for the stakeholder-model of corporate governance.

Thus, not only financial objectives are striven for and more perspectives are considered,

other stakeholder groups like customers and employees attract notice. The BSC attends

consequently a stakeholder-orientated strategy which influences also HRM and HR-policies.

Insofar, the BSC concept accomplishes all premises and functions of the so called HPWS, if

it is completely implemented as recommended (BECKER et al. 2001: 27ff). It seems that

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stakeholder-orientated companies should have fewer problems with the implementation of

the BSC, since the BSC is already designed as a stakeholder-orientated management concept.

As specified above, HR-strategies and ­practices in German companies are in accordance

with the approaches of the BSC. Both concepts, the BSC as well as stakeholder-model of

corporate governance, contain many elements of HPWS in consideration of HR-policies.

Because of the already existing use of HPWS in stakeholder-orientated companies like in

Germany, the BSC implementation process should be absolutely possible and simply

practicable. All the more it is remarkable that still many German companies have problems

with the implementation process of the BSC as SPECKBACHER/BISCHOF discovered.

Especially the so widely-used non-consideration of such an important HR-aspect as the

learning-and-growth perspective when designing the BSC gives reason to be surprised (2000:

807). One critical point could be the differences in compensation between the different

concepts. The change from widely-used collective compensation in German companies, inter

alia in consequence of institutional framework and high unionisation, to more performance-

based payment as propagated within the BSC concept by Kaplan/Norton could result in

implementation problems (BING et al. 2003: 344 and KAPLAN/NORTON 1996b: 193f).

Altogether, the theoretical premises for a successful implementation of the BSC and the

adoption of its HR-strategies and ­policies in stakeholder-orientated enterprises are very

good and should be easily practicable. If the BSC with its improved HRM is implemented,

satisfaction is high and performance and profit improve, as already mentioned and verified

again beneath.

In short-term shareholder-orientated companies the implementation process of long-term

orientated HR-strategies through the BSC should prove to be more difficult on the first view.

But on the other hand it is absolutely possible to realise this change. This view is supported

by Appelbaum et al. They indicate that long-term orientated HR-practices like the ones of

the BSC can be adopted in more short-term orientated companies with their focus on

shareholders. In the following it is easier to explain this by means of an example, in that case

the US-economy which is rather short-term orientated in regard to HR-policies. Due to

competitive reasons and change of market orientation, parts of US-economy have partly been

forced to concentrate more on high quality and diversification of products, where the demand

for high-qualified and skilled workers increases. APPELBAUM et al. as well as BECKER et

al. emphasize that HR can be seen by shareholder-orientated firms as a source of competitive

advantage and an important element to increase share value, rather than a cost-cutting option

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to rise profit (2000: 7ff and 2004: 13ff). Further, they show evidence of the partially

successful change from traditional work organization to HPWS in US companies, which

underlines the possibility of successfully adopting long-term HR-practices like the ones

resulting from the BSC by short-term orientated companies. Furthermore, in the future, US

firms will be reliant on more long-term HR-practices with greater investments in specific

human capital. Because of the increasing decline in US governments′ expenditures in

educational and community-based programs which provided corporations with educated

employees, companies are responsible for training their own workers to a high standard and

providing a greater degree of social security through longer employment duration in the

future (BING et al. 2003: 345). So, HR can indeed also be seen as a source of profitability

and an instrument to increase share prices, for it is in the interest of US companies to invest

more in workers′ skills and adopt long-term orientated HR-strategy, which results from the

use of the BSC. Especially low US job protection makes it easier and more attractive to adopt

long-term orientated strategies, as well as the necessity due to changes in general market

orientation which yield a need for more highly qualified employees. The already practised

and established performance-based compensation can simplify the implementation of the

BSC and the involved HR-policies. Altogether, the BSC and its influence on HRM and HR-

strategy can make an essential contribution to play to the new conditions and necessities

which are resulting from institutional and economical changes, and to introduce HPWS. With

its use and implementation it is possible to adopt these long-term HR-policies in short-term

shareholder-orientated companies.

Different researchers verified empirically that the BSC is an instrument for success and that

it makes an essential contribution to performance improvement and business return. With

their results they show that the implementation of the BSC and its influence on HRM and its

strategies and the involved improvement of HR-practices are successful both in stakeholder-

orientated companies like in Germany and particularly in shareholder-orientated

organisations like US ones. BECKER et al.′s empirical study with 429 US companies about

the use of the BSC shows that companies with a high HPWS index2 are superior to the ones

with a low index. In respect of HR-practices, HR-outcomes and business performance,

organisations with a high HPWS index attain much better values and a higher performance

than companies with less effective HRM. Employee turnover are close to half, sales per

2 The HPWS index measures the extent to which a firm′s HR system is consistent with

the principles of a high-performance HR-strategy (BECKER et al 2001: 16).

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employees are four times as high and the ratio of company market value to the book value3 of

assets is more than three times as large in high-performing companies (BECKER et al. 2001:

13ff and see Appendix: Table 1). DEBUSK/CRABTREE are in complete agreement. They

analysed that 88% of the BSC using companies reported performance improvements and

two-third of them also reported an increase in profits. Most of these companies ascribed these

effects to improved HR-practices through the BSC (2006: 46f). This effect is also observable

with stakeholder-orientated companies. HORVÀTH&PARTNER GMBH verified that more

than 85% of the participating organisations improved their performance as well as their

growth in sales (2004: 4f). These results show that the BSC implementation will be

successful both in stakeholder-orientated organisations and shareholder-orientated

companies. HRM and HR-strategies become more high-performance orientated by use of the

BSC. It links HRM to business strategy and supports implementing companies in following a

long-term orientated HR-strategy. The empirical researches verify that HPWS with its long-

term orientation improves business performance and profit. It is also shown that short-term

orientated companies can successfully adopt long-term orientated HR-strategies which result

from the BSC implementation. Financial results are still considered and will also be

improved.

5.

Conclusion

The development of the BSC by Kaplan/Norton has been the necessary reaction to the

increasing criticism of the one-dimensionality of other performance measurement systems,

the focus of which was only limited to financial and past figures. Through the incorporation

of customers, business processes and human capital, a controlling system is developed which

complements financial measures of past performance with non-financial measures of future

performance and which analyses the value of different business units and their contribution

to organizations′ performance. Especially HR-processes attract higher notice through the

BSC. The consequent application of the BSC results in that employees′ competence and

motivation as well as training and cooperation in teams and organisational units become the

centre of business strategy. Furthermore, a successful implementation can only occur through

3 This ratio indicates the extent to which management has increased shareholder′s initial

investments and can therefore be seen as a key indicator of management quality (BECKER et

al 2001: 18).

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the extensive support of HRM. For this reason HRM and HR-processes gain in importance,

which is why HRM increases its significance within the company through its essential

contribution to business strategy. The success of the BSC is hence also depended on the

support and quality of HRM.

Furthermore, the consequent application of a BSC results in a simultaneous use and

implementation of a long-term orientated HR-strategy. This arises from the different

considered HR-aspects which abut on HPWS. Consequently, the use of a regular BSC is

associated with the simultaneous implementation of a long-term orientated HPWS and HR-

strategy. But different researchers also detected problems and failures in the BSC

implementation processes. Especially, difficulties in measuring "soft" figures and problems

in BSC′s communication and breaking down processes can be identified and explain the

partly high ascertained degree of dissatisfaction. These objections can be attributed to the

irregular and only partly use of the BSC. It is empirically verified that a regular and

consequent application of the BSC results in performance improvements and higher

profitability. This underlines the necessity of the complete and regular application and

implementation of the BSC as recommended by Kaplan/Norton.

The consequent application of the BSC and the linked use of long-term orientated HR-

strategies also underline that both the BSC and long-term HR-strategies can be seen as

instruments for success. Human capital is of extreme importance as shown by different

empirical results. Different studies point out that long-term HR-strategies can be

implemented successfully both in already long-term and stakeholder orientated companies

like continental European ones as well as in previously short-term and shareholder orientated

enterprises like they are common in the Anglo-American environment. It is verified that the

BSC and involved long-term orientated HR-strategies and ­policies improve business

performance, no matter what orientation confirmed before. The use can result in better

financial results and a higher profitability, which is why human capital has to be seen rather

as an advantageous and competitive factor than as a cost-cutting factor to improve financial

results in short-term. Hence, the BSC supports the dispersion of HPWS and makes an

essential contribution to the significance and value adding of HRM-processes and HR-

processes. Furthermore, it seems to be that through the BSC a simultaneous disruption of the

previous dominance of the short-term orientated HR-strategies in the Anglo-Saxon area

occurs.

Altogether, the shown results consider that the long-term orientated HR-practices and ­

policies implemented by the BSC have a positive impact on business results. Furthermore,

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they influence business performance more than short-term orientated HR-practices do,

wherefore it can be adhered that long-term orientated HR-strategies are in a way superior to

short-term orientated ones. In addition, it is shown that chances and opportunities of the BSC

will prevail the risks and threats by a consequent use of the BSC.

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Appendix

Table 1: Comparison of High and Low HRM Quality

Bottom 10 % Top 10 %

HR Index

HR Index

HR practices

Number of qualified applicants per position

8.24

36.55

% of hired based on a validated selection test

4.26

29.67

% of jobs filled from within

34.90

61.46

% in a formal HR plan including recruitment, development and

succession

4.79

46.72

Number of hours of training for new employees (less than 1 year)

35.02

116.87

Number of hours of training for experienced employees

13.40

72.00

% of workforce whose merit increase or incentive pay is tied to

performance

23.36

87.27

% of workforce who received performance feedback from multiple

sources (360)

3.90

51.67

Target percentile for total compensation

43.03

58.57

% of the workforce eligible for incentive pay

27.83

83.56

% of difference in incentive pay between low-performing and high-

performing employee

3.62

6.21

% of the workforce routinely working in a self-managed, cross-functional

or project team

10.64

42.28

HR Outcomes

Extent to which strategy is clearly articulated and well understood

throughout the firm

3.40

4.21

Extent to which an employee understands how his or her job contributes

to the firm′s success

2.80

4.00

Extent to which senior management sees employees as a source of

value creation versus a cost to be minimized

3.31

4.21

Extent to which company attempts to provide job security, even if

confronted with declining financial problems

2.71

4.11

Extent to which firm′s decision-making style can be described as

participative

3.02

3.81

Firm Performance

Employee turnover (%)

34.09

20.87

Sales per employee

$158,101

$617,567

Market value to book value

3.64

11.06

*Each of the variables in the "HR-Outcomes" section is scaled from 1 to 6, where 1 = "not at all" and

6 = "to a very great extent"

(BECKER et al. 2001: 13f)

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