Article
American Economic Review: Papers and Proceedings

Formal Measures in Informal Management: Can a Balanced Scorecard Change a Culture?

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Abstract

Agency theorists, historically, have analyzed what kinds of performance measures should be used in formal incentive contracts. For example, after Kaplan-Norton proposed a balanced scorecard of both financial and non-financial measures, some envisioned its role only in formulaic compensation contracts. We describe an alternative view, in which the scorecard's formal measures are created and used for informal management, with executives using discretion and judgment rather than managing solely "by the numbers." We discuss relational incentive contracts that use informal weights on formal performance measures. More importantly, we suggest how formal measures can be used in new models of informal management. We also propose that imposing ostensibly perfect measures on an organization from outside can work less well than having managers develop their own, potentially inferior, performance measures. In this sense, it is the creation of a balanced scorecard, more than actual use that can change an organization's culture.