Citibank: Performance Evaluation

What happens if they get rated "Below Par"?

no bonus

James McGaran manages the most important branch in the Los Angeles area. James' branch is tough to manage due to the proximity to competitors and a demanding clientele base. His branch generates the highest revenue and contribution margin in the LA area. How would you have rated James' performance if the old system were still in place?

- He would have received an "above par" rating and a 30% bonus

What were the performance objectives?

Financial Strategy Impementation Customer Satisfaction Control People Standards

Financial Objective

Variables: Revenue Expense Margin Measures: measured objectively accounting system Target: negotiated (subject to manipulation/favoritism)

Control Objective

Variables: audit legal regulatory Measures: measured subjectively by auditors using standard procedures Target: 4 (on 1-5 scale) common target

Standards objective

Variables: leadership business ethics/integrity customer interaction/focus community involvement contribution to overall business Measures: measured subjectively by the employee's superior Target: none

People objective

Variables: performance management teamwork training/development employee satisfaction Measures: measured subjectively by the employee's superior Target: none

Strategy Implementation Objective

Variables: revenue from target segments households (total, new, lost) retail market share Measures: measured objectively, accounting system additional data collection Target: negotiated (subject to manipulation/favoritism)

Customer Satisfaction objective

Variables: customer satisfaction Measures: survey conducted by external firm telephone interview of 25 customers who visited branch and Citibank services (e.g. ATM) Target: score of 80 common target

What happens if they get rated "Par"?

bonus up to 15%of salary

What happens if they get rated "Above Par"?

bonus up to 30% of salary

Synopsis

• Citibank's strategy is to increase profitability by providing excellent customer service • Citibank introduces a new performance measurement system (balanced scorecard) that includes non-financial measures such as customer satisfaction • The top financial performer has a below-par non-financial performance

What is Citibank's strategy for the Balanced scorecard?

• Define a specific performance scorecard and link rewards to the accomplishments of the specific measures to induce employees to pursue the firm's strategy • To implement its strategy, Citibank decides to include nonfinancial measures using a balanced scorecard

Focus

• Financial and non-financial performance measures • Balanced scorecard

• What are the pros and cons of giving him a "below par" or "par" rating on customer satisfaction? • Arguments in favor of a "below par" rating for customer satisfaction

• Following guidelines of the new system (i.e., credibility) • This move emphasizes Citibank's strategy: It signals to other managers that company is committed to its strategy • Customer satisfaction is a leading indicator of performance. Low satisfaction will result in poor future financial performance • Focuses all managers' attention on the importance of customer satisfaction to achieving intended strategy

• Arguments in favor of a "par" rating overall

• Gives credibility to the new strategy and the performance evaluation system • Communicates the importance of customer satisfaction to the rest of the organization • Motivates James and other managers to focus more attention on strategically important variables

What about customer satisfaction? • This rating is critical not only for James but for the whole company. Why?

• If he gets a "below par" rating on customer satisfaction, he will not be eligible to receive an overall "above par" rating. In this case, he cannot receive the 30% bonus • The committee's decision is carefully watched by other branch managers

• What do you think happened?

• James received a "below par" rating on customer satisfaction • Frits chose to override the system and gave James an overall "above par" rating for the year • To indicate the importance of customer satisfaction, however, Frits awarded James a 25% bonus instead of the maximum 30%

What are the rules for the performance evaluation and rewards?

• Need "par" or "above par" in all 6 objectives for an above par overall evaluation • Need "par" rating on Control to be eligible for a bonus

• Linking employee pay to nonfinancial performance measures offers a number of potential benefits:

• Nonfinancial performance measures help communicate strategy to employees and motivate specific actions to further this strategy • Nonfinancial measures can be leading indicators of future financial performance

• Arguments in favor of an "above par" rating overall

• Rewards James' effort. Allows him to receive maximum bonus of 30% • This is what James would have received if old system were still in place • Easier to communicate to James • The system should be flexible to adapt to exceptions • Will keep James' motivation up • Par rating could cause conflict, reduced motivation, quitting (James may resign if he feels that the new evaluation system penalized his efforts)

• How would you rate James' other measures (above/below/at par)?

• Strategy implementation: Rated "above par" in all quarters but one • Control:Rated "above par" in all quarters • People: Subjectively rated "above par" in all quarters • Standards: Subjectively rated "above par" in all quarters

• Arguments in favor of a "par" rating for customer satisfaction

• The survey may not correctly measure customer satisfaction (i.e., selection bias; small sample size) • His customers are more demanding; target may be too high • James does not control all factors that affect measured customer satisfaction (e.g., ATM; phone banking) • Too much emphasis on customer satisfaction may induce wrong asset allocation; over-investment in customer satisfaction • James became branch manager in 1992 and is still producing great financial results; customer satisfaction does not seem to be leading indicator of future performance

• Citibank's Strategy

• To build a profitable franchise by providing relationship banking combined with a high level of service through: careful personal attention and a broad selection of financial products • A good relationship with customers is a key differentiator from its larger competitors, and is critical to the long term success of the company • Customer relationship is a non-financial measure that has been ignored in previous employee evaluations

• Balanced scorecard • The primary purpose of a balanced scorecard is to

• communicate a particular strategy down the organization and • establish a basis for evaluation based on this strategy