Balanced Scorecard Report

The Challenges of
M A N A G E M E N T
excellence and learning and growth
areas. Annual targets were derived
Target Setting from the company’s budget,which
was tightly aligned with strategy.
By Janice Koch, Editor
Initially, Endesa used three ranges
In our May–June 2006 issue, Robert Kaplan examined some for targets: 0 to 75% of target
fundamental issues in target setting, focusing on how to (“red” or poor), 75% to 100%
design stretch targets that sufficiently motivate people to (“yellow” or below target),
strive to outperform targets without encouraging overly and over 100% (“green” or over
risky behavior—or raising the cost of the incentive so that target). But when general directors
P E R F O R M A N C E

received a report filled with

it outweighs the financial gain. In this first of an occasional
yellows and reds, it wasn’t very
series on the challenges of target setting, we’ll look at specific motivating, says Andalaft. He
challenges two organizations faced in establishing stretch and his team realized a broader
targets—and the solutions they devised. scale was necessary to distinguish
between the good, the bad, the
Stretch Targets and Variable (must relate to the main function
mediocre, and the extraordinary.
Compensation at Endesa of the person being evaluated),
Endesa added a fourth target
and time-relevant (captures an
Madrid-based Endesa is Spain’s range, as follows:
adequate time period based on
largest electric utility, the number- the nature of the KPI). Of attain- 0% to 50% of target = red
one private utility in Latin able, he notes “the goals have to (minimum target, i.e., required
America, and a major operator be perceived as being challenging by industry regulation)
in Mediterranean Europe. Due and motivating, but attainable
in part to its stellar performance 50% to 87.5% = yellow
with a reasonable amount of
and growth, the utility has become (insufficient)
effort. Where possible, they must
the object of a protracted and be negotiated with the team 87.5% to 99.9% = light green
complicated takeover battle. In responsible to obtain greater (close to or at target)
2000, two years after it was fully commitment.” 1
privatized, the company adopted above 100% = dark green
the BSC to facilitate its strategic As part of the company’s BSC- (exceeding target)
transformation—a transformation based strategic transformation
By making 100% the budgeted
so impressive that it won Endesa (and transition from public
full-target amount, Endesa now
a place in the BSC Hall of Fame entity to private enterprise),
had a way to establish a true
in 2005. corporate HR implemented a
stretch target. But there still wasn’t
new performance-based variable
To set effective targets, particularly enough of a range separating
compensation system for manage-
stretch targets, managers must target and above-target perform-
ment—an uncommon practice
strike a balance: between setting ance. So corporate HR adjusted
among utilities, and one that
the bar high enough to encourage the scale from a 0%-to-100%
upset what in effect had been a
greater performance without range to a 0%-to-120% spread,
system of near-guaranteed bonuses.
prompting excessively risky in which stretch performance
Not surprisingly, it triggered resist-
behavior; and differentiating extended 20% beyond scale.
ance. Andalaft knew that the new
between “good” and “great” This enabled them to achieve
system would require great rigor
performance—without leaving the needed differentiation. Says
and fairness to win managers
loopholes that allow people to Andalaft, “We sold the idea by
over—and do its job. “When
game the system. Juan Andalaft, saying the company was willing
you’re playing with the money
until recently Director of Corporate to reward even more the best
of people with variable bonuses,
Budgeting and Controlling at performers by putting more
it’s crucial for the methodology
Endesa and the driving force money on them.”
to be precise, repeatable, and
behind the company’s BSC pro- objective,” he points out. The total money the company
gram, used the SMART formula allocated to bonuses remained the
for designing Key Performance Endesa’s budgeting and controlling
same. “To put 1/3 of the people
Indicators (KPIs): simple (easy to unit did macroeconomic analysis,
above 100%, we needed to have
understand for those responsible economic and financial planning,
1/3 below 90%; by adjusting our
for its performance), measurable and annual budgeting at the
ranges we were improving the
(has a precise calculation method- corporate level. They also set
standard deviation,” Andalaft
ology), attainable, representative all the metrics for the business,
explains.
including those in the operational
14
 July–August 2007

Setting Stretch Targets at work to align existing measures. TD Ameritrade sets three levels
TD Ameritrade Division heads have some latitude of target: external (what it reveals
in adding or eliminating meas- to Wall Street), internal (actual
Omaha, Nebraska–based TD ures, though there is a negotiation desired targets, less conservative
Ameritrade is a leading online process they go through with the than those it reveals publicly), and
brokerage that in 2007 was ranked analysis, planning, and reporting stretch. For example, an external
number one by Barron’s and group to maintain a disciplined target of 200 would have an inter-
named to Forbes magazine’s metrics and measurement process. nal amount of 225 and a stretch
Best Big Companies List. Each unit leader chooses a key amount of 300. Like Endesa, the
As a brokerage, TD Ameritrade measure—the most relevant, most company uses four performance
understands that volatility is representative target—that supports indicators: red (below minimum
an everyday business reality. each enterprisewide objective. threshold), yellow (between
However, the company, which threshold and target), green
TD Ameritrade’s rationale goes
serves retail traders and investors (between target and outstanding),
like this: if you want people to
and also offers services to regis- and blue (outstanding). These
reach 200, set the target at 300,
tered investment advisers, recog- ranges enable the company to
not 205. Sound extreme? Not
nizes that while short-term results show what it considers to be
really, when one considers the
are strongly influenced by exter- everything from “the least we
expertise behind the target-setting
nal market conditions, that is expect” to “truly outstanding
(many of the company’s executives
not the case over the longer term. performance.”
are former consultants, profes-
According to John Langwith, sionals with significant experience The next step is range setting.
managing director of analysis, in performance measurement Each metric has its normal (histor-
planning, and reporting, “Over and the complexities of statistical ical) variability. A measure driven
the long term, those ups and analysis that go with the investment by external factors, Langwith
downs average each other out; in business) and the company culture notes, will have much wider
three years, the market is usually —the high-pressure, highly variability. Asymmetry is impor-
up more than it is down, and competitive brokerage world. tant in designing stretch targets,
the U.S. economy grows more Furthermore, says Langwith, “If since outstanding and mere
quarters than it doesn’t.” On that you create a difficult target, you threshold performance are not
basis, the company is comfortable force people to think outside the equidistant from the target. That
setting growth targets. box—to make them think hard 200 target would have a threshold
The real challenge for TD about their business model. of 195, which means only five
Ameritrade is not how to interpret Setting stretch targets makes you points are needed to trigger a red
performance in the context of continually challenge the way flag, while it takes 25 to trigger
volatility, but rather how to your base model is set.” outstanding performance. Why
define, motivate, and reward is this important? As Langwith
Consider one of TD Ameritrade’s
exceptional performance—and explains, “Overall range is deter-
key company goals: increasing
how to do it fairly, in a way mined by variability—and estab-
trading volume (number of trans-
that acknowledges the degree of lishes the minimum below and
actions) per day. Stretch targets
difficulty in achieving company- above. How close to that mini-
are, of course, designed to
wide objectives from unit to unit. mum you set the threshold or
push performance to that goal.
outstanding mark is based on
Performance metrics are very Transaction levels, Langwith
the degree of difficulty the target
serious business at TD Ameritrade. points out, are driven by the
represents, as well as the severity
Stretch targets are set by the company’s tools, speed of execu-
of a miss—and the importance of
Senior Operating Committee— tion, and the quality of the client
overachieving.” If missing a target
CEO Joseph Moglia, along with experience. Those who manage
has serious ramifications, the
the heads of TD Ameritrade’s the transaction part of the business
company will set a narrow range
major operating divisions—all must determine what, if anything,
beneath the target. Take, for exam-
of whom set company strategy needs to be changed to drive
ple, the goal of achieving a certain
and who develop targets in con- that growth. If targeted growth
level of growth in a particular
junction with finance and busi- is greater than what the market
market. If the company has made
ness development. Langwith’s can provide, the company must
a substantial investment in that
team meets monthly with a team assess how it will seize that
market, the range between target
of metrics experts representing market share—through new prod-
and threshold will be set tight.
each area of the business; they ucts, quality, tools, and so forth.
Says Langwith, “We pay incentives
regularly vet new measures and

15
Balanced Scorecard Report

in many cases off these ranges, so a tool it refers to as the “zigzag C O M I N G U P I N B S R

a tight range means underperfor- chart.” With it, the company plots
mance will kill your incentive the key metric identified by • Robert Kaplan (with Palladium/London
very quickly. A large range on the each unit leader as representative VP Catherine Jackson) on Managing
upside means people have a way of performance against a given by Theme
to go to achieve the full payout; enterprisewide objective.
conversely, with a tight range (Performance is tracked monthly; • Strategy Maps for Economic
Development: New Efforts in
on top, overachievement could targets are set each quarter.)
Emerging Nations
quickly get you to a much larger Performance in a given metric is
payout.” plotted on a chart that shows the • The Role of Technology in Individual
full range of target levels, from Performance Management
Keeping Targets and Ranges 0% to 150%, with each unit’s per-
Aligned with the Zigzag Chart formance stacked on top of the • Human Capital Management:
Five Strategic Challenges
To get the best performance out others’. In Figure 1, for example,
of its people, TD Ameritrade for the strategic theme “Grow • A Four-Point Program for Managing
strives to achieve what it calls Accounts,” we can see the range Initiatives
“aligned commitment”: ensuring of performance across all units.
that the degree of difficulty in Overachievement in one area of • Findings from Balanced Scorecard
the company should be related Collaborative’s Exclusive New Survey
reaching each new target range is of OSMs
as equal as possible across lines to overachievement in another. If
of business. In other words, it a range is out of sync, this chart • Debunking the “Big” Myth: Why
wants goals for the same category will indicate that. If four of the the BSC Is Just as Effective for Small
of measure to be equally attain- measures are highly positive but Organizations
able across units. To keep targets one is negative, it could mean
and ranges aligned in this way, either a very successful period
the company recently instituted for those four units—or some kind of anomaly or unfair target
for the fifth one. An anomaly in
Figure 1. Aligning Targets with the Zigzag Chart one month would typically trigger
some kind of remedial action.
Theme: Grow Accounts
After one year of use, the response
to the zigzag chart has been
AREA/LEVEL METRIC TARGET SUCCESS “very positive,” says Langwith.
“Sometimes product heads and
50% 100% 150%
branch sales heads have different
ideas about what their targets
Enterprise Total new should be. This helps generate a
accounts
collaborative approach across the
groups.”

New trader
1. From a presentation given to the SFO Workshop
accounts
for RAO-UES in Moscow, June 26, 2006.
Client Group
New investor T O L E A R N M O R E
accounts
See “Target Setting” (BSR May–
New client June 2006; Reprint #B0605C)
contacts and “The Limits of Benchmarking”
Branches (BSR November–December 2005,
New accounts
Reprint #B0511C), both by Robert
through branches S. Kaplan.
See Performance Dashboards:
Marketing Cost per account Measuring, Monitoring, and
Managing Your Business by
Wayne Eckerson, John Wiley &
Sons, 2005.
Product #B07070

This new tool allows TD Ameritrade’s senior management to quickly spot anomalies in the range
of performance across all business units—and help maintain equity in target setting. Reprint #B0707D

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