Pay for Performance: The CFO's Stake: BlueCross BlueShield of Louisiana Developed an Innovative Way to Align Corporate Goals, Strategies, and Employee Accountability
Rishell, Mark, Becker, Walt, Strategic Finance
CFOs are increasingly concerned about their company's ability to achieve desired results as fierce competition, savvy consumers, uncertain economic and regulatory environments, and innovation are the norm. To win, and in some cases simply to survive, companies must help employees commit to the overall corporate strategy, understand how their performance contributes to results, and be motivated to make a difference.
CFOs view aligning operational goals with desired financial objectives as a natural outgrowth of their responsibilities that can make or break the bottom line. Many also recognize the need for an integrated, systemic approach to performance that drives organizational alignment, capability, and accountability. BlueCross BlueShield of Louisiana (BCBSLA) implemented a Performance Accountability System (PAS) to achieve this. Developing and implementing such a business process requires the leadership, financial, operational, and organization change expertise that only senior executives can provide.
When I (author Mark Rishell) joined BCBSLA as CFO in 2002, the company was generating, and continues to generate, excellent financial results. Nevertheless, BCBSLA still needed to change. Our recent results were driven largely by an industry-wide positive underwriting cycle, profitable contractual relationships with other Blue Cross Blue Shield plans, and the company's continued presence as the market-share leader in Louisiana. Like other health insurers, BCBSLA faces continuing increases in healthcare costs and competition. Our company's long-term competitiveness depends on our ability to manage our risk pool, operate more efficiently, and develop innovative products. To fulfill our mission of providing excellent service and access to high-quality and cost-effective healthcare, we needed to improve our ability to acquire and retain a targeted pool of customers, reduce operating costs, and develop products that meet the needs of our markets. To achieve our objectives, we found ourselves exploring significant potential investments in technology and process redesign. As we evaluated technology upgrades and processes to redesign, it became clear that our success in transforming the organization was dependent on our employees and their ability to manage in a changing culture. To support these planning efforts and the objective of ensuring continued long-term success, our board of directors engaged Sibson Consulting to review the company's executive pay and performance practices. Their objective was to make recommended changes to the way BCBSLA manages executive pay and performance in order to:
1. Align the system with BCBSLA's strategic directions and drive desired business results.
2. Ensure that BCBSLA's programs are industry standard in design, that they are competitive in financial rewards, and that costs are consistent with performance.
3. Sustain BCBSLA's ability to attract, retain, and motivate its executives.
The result of Sibson's early efforts with our company was a Performance and Rewards Strategy that clearly defined a "performance contract" between the board and management. The strategy addressed six principles to guide the development and management of executive pay and performance programs:
* Pay Prominence, defined as the extent to which compensation should influence employee actions and decisions.
* Competitive Framework and Positioning, defined as criteria for choosing companies used for pay and performance comparisons, competitive positioning of target pay levels relative to the defined peer group, and the mix of compensation elements including salary and performance incentives.
* Performance Measurement and Goal Setting, defined as the type of performance measures (e.g., financial, operational, measurable), the organizational level(s) at which results will be measured, the degree of judgment employed in making incentive award decisions, the time frame of measurement for incentives, the standards against which performance will be measured for incentives (e. …