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Ethics and Performance Measures for Compensation

Scenario:

The Eddison Electronics Company (EEC) owns a wide variety of manufacturing companies that make sophisticated electronic controls. You are EEC's corporate business financial analyst. Your responsibilities include the following:

Creating and analyzing the monthly performance of each company within EEC.
Providing and analyzing costing information for each company within EEC.
Analyzing the major capital projects submitted by each company.

EEC has introduced a new 1.5GB computer memory chip. The following is the plan and first-year results of the 1.5GB chip project and the financial activity for 2006.

The President of EEC has decided to adopt the Balanced Scorecard. You received an e-mail from him asking about tying compensation with performance measures.

Task:
Develop a memo in response to the President's questions in which you discuss unethical behavior that can result if the wrong performance measures are used to tie performance measures to compensation. How can EEC avoid these behaviors? How should EEC tie performance measures to compensation?

Solution Preview

Develop a memo in response to the President's questions in which you discuss unethical behavior that can result if the wrong performance measures are used to tie performance measures to compensation. How can EEC avoid these behaviors?

One of the major ethical considerations in terms of tying performance measures to compensation is setting accurate performance measures which is attainable and not based on overambitious expectations. In other words, the employees should consider the performance measures to be fair and attainable and should clearly understand each element of the measure. If the companies will try to implement inaccurate/wrong performance measures which is unacceptable to the employees, employees will not be motivated via such measures as they will consider it unfair.

Another unethical behavior that can result with tying performance measures to compensation is setting measures that do not provide full opportunity to each employee and particular few employees or certain set of employees, thereby proving to be biased and unfair. Such performance measures, thus, deny fair and equal opportunity to earn rewards/compensation.

Wrong performance measures can also lead to behavior such as exploitation of the employees by putting too much pressure on them to attain results.

EEC can avoid such behavior by conducting indepth analysis of each job position and then developing fair, accurate and unbiased performance measures based on reasonable expectations and considered attainable by the employees. Tools suchas benchmarking of best practices by other companies in this area can be used as a good approach to set fair performance measures. Companies can appoint external consultants to implement effective compensation system based on performance measures. It is essential to secure opinion, feedback and opinions of the employees at all levels before finalizing such measures to ensure their buy-in towards the plan. Further, employees should fully understand each aspect of such performance linked compensation plan and all apprehensions or confusions pertaining to the measures should be clarified in advance. Further, to avoid unethical behavior during the administration, the administrators of the compensation and performance measurement plan should be fully trained to oversee the implementation and administration in a fair manner.

To facilitate system integrity and a ethical pay for performance based compensation plan, one of the most fundamental steps is simply to ...

Solution Summary

The response gives a discussion on the issues of tying performance measures to compensation in terms of what is and is not ethical for the fictional EEC company. 1398 words with 4 references.

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