The impact of uncertainty and ambiguity when implementing the Balanced Scorecard

The Balanced Scorecard is now a widely used control tool which provides managers with previously unavailable insights into the factors that drive profits. However, the lack of obvious and objective metrics for many of the non-financial variables in the Balanced Scorecard means that it remains unclear how the Balanced Scorecard should be implemented, what its usefulness will be and how it should be incorporated into performance evaluation. In this paper, we explore how the information provided by the Balanced Scorecard changes the perceptions of managers and workers about how effort input is translated into output and profit. Within a principal/agent setting, we show that even when the Balanced Scorecard is not explicitly linked to compensation, it can have an implicit effect since the scorecard increases the information content of the metrics that are used by managers when determining pay-for-performance compensation, and managers cannot credibly commit to ignore that information. We identify circumstances where this effect reduces risk, enabling lower cost contracts to be written between the firm and the worker. However, the top-down approach inherent in a Balanced Scorecard implementation may also result in increased ambiguity and perceived risk in worker compensation, a possibility that is not recognised in the Balanced Scorecard literature. This phenomenon, by contrast, can undermine the benefits of implementing the Balanced Scorecard.