Management Accounting · Performance measurement - application

Performance Measurement Issues and Behavioural Aspects in ACCA Management Accounting

Updated 11 October 2026 · Fact-checked

Performance measurement issues are the problems that arise when a measure drives the wrong behaviour. Examples are short-termism, manipulation and dysfunctional behaviour. To answer a question, identify what the measure rewards, show how managers could act to hit it at the business's expense, then suggest fixes such as balanced, controllable, long-term measures.

Understand Performance Measurement Issues and Behavioural Aspects

A performance measure is a number used to judge how well a manager, unit or business is doing. Managers usually behave in ways that make their own measure look good. So a measure does more than report results. It steers behaviour.

That creates problems. Short-termism (also called myopia, meaning short-sightedness) means focusing on results this period at the expense of long-term value. A manager judged on annual profit may cut training, maintenance or research. Profit rises now, but the business is weaker later. Return on investment can also cause this. A division may reject a project that would benefit the company, because it would lower the division's own ROI.

Dysfunctional behaviour means actions that help the manager's measure but harm the organisation's goals. Manipulation is a form of it. Examples are delaying invoices or purchases across the year end, adjusting estimates, or reporting false figures. Other examples are focusing only on what is measured (tunnel vision), playing safe to avoid being judged badly (risk aversion), and choosing a lower target so it is easy to beat.

Other problems include measures that are not controllable by the manager, too many measures that cause confusion, and measures that conflict with each other. For example, cutting cost can reduce quality. Measures based only on past financial data also say little about the future.

Good performance indicators are linked to organisational objectives and are controllable by the person judged. They are also measurable, clear, timely, and fair. A balanced set mixes financial and non-financial measures. A common memory aid is SMART: specific, measurable, achievable, relevant and time-bound.

Indicators can also be lagging or leading. A lagging indicator reports results that have already happened, such as profit or sales. A leading indicator gives an early signal of future results, such as customer satisfaction, order backlog or staff training hours. Use both.

Key formulas to remember

Characteristics of good indicators (SMART): Specific, Measurable, Achievable, Relevant, Time-bound; Also add controllable, understandable and timely. Use whichever list fits the question wording.
Lagging vs leading indicator: Lagging = reports past outcomes; Leading = predicts future outcomes; Profit, revenue and market share are lagging. Customer satisfaction and employee training are usually leading.
Main behavioural problems: Short-termism (also called myopia), manipulation, tunnel vision, risk aversion, sub-optimisation; Always link each problem to what the measure rewards. Myopia is another name for short-termism, not a separate problem.
Controllability principle: Judge managers only on items they can influence; Uncontrollable items distort fairness and reduce motivation.

How to solve Performance Measurement Issues and Behavioural Aspects questions

Use this method for any question on problems with performance measures. It works for multiple choice and for short multi-task answers.

1Read the scenario and identify the measure being used, such as annual profit, ROI, cost per unit or a bonus target.
2Ask what the manager is rewarded for doing. Behaviour follows reward.
3Find the action that improves the measure but harms the company, such as cutting maintenance or delaying purchases.
4Name the problem precisely: short-termism (also called myopia), manipulation, tunnel vision, risk aversion or sub-optimisation.
5Check controllability. Is the manager judged on items they cannot influence?
6If asked for a remedy, suggest balanced measures, long-term targets, controllable-only measures, participation in target setting or audit checks.
7For indicator questions, decide if the measure reports past results (lagging) or signals future results (leading).
8Match the answer to the question type: select the stated number of responses, or give a short reasoned answer.

Quickest way: Reward, action, harm

When to use it: Use this in Section A questions where you have about a minute per mark and the options all sound plausible.

Underline the measure in the question.
Say to yourself: reward, action, harm. What is rewarded, what will the manager do, and what is damaged?
If the harm falls in future periods, choose short-termism.
If figures are altered or timing is shifted, choose manipulation.
If the manager ignores unmeasured areas such as quality, choose tunnel vision.
For leading or lagging, ask: does it tell me what has happened, or what is likely to happen?

Common mistakes in Performance Measurement Issues and Behavioural Aspects

Treating short-termism and manipulation as the same thing.
Both involve gaming a measure, so they feel alike.
Fix: Short-termism trades future value for current results with real actions. Manipulation changes timing or reported figures to look better.
Calling profit a leading indicator because it matters most.
Students confuse importance with timing.
Fix: Profit is lagging because it reports what has already happened. Leading indicators predict, such as customer satisfaction or orders on hand.
Listing characteristics of good indicators without applying them.
Students memorise the list and stop there.
Fix: Tie each characteristic to the scenario. For example, say the measure is not controllable because the manager cannot set selling prices.
Suggesting that more measures always solve the problem.
Balanced scorecard thinking is applied too broadly.
Fix: Too many measures cause confusion and conflict. Recommend a small balanced set linked to objectives.
Blaming the manager rather than the measure.
Students focus on ethics instead of system design.
Fix: Explain that the measure creates the incentive. Then suggest changing the measure, targets or controls.

Worked examples

Example 1

A division manager is paid a bonus based only on this year's divisional profit. The manager cuts staff training and delays equipment maintenance, so profit rises. Name the problem and explain the harm. Suggest one improvement.

Show the solution

The measure is annual divisional profit, and the bonus rewards a higher figure this year.
The actions are cutting training and delaying maintenance. Both reduce costs now.
The harm falls in later years: lower skills, more breakdowns and weaker service.
This is short-termism, because current profit is gained at the expense of long-term value.
An improvement is to add non-financial or long-term measures, such as training hours, equipment downtime and customer satisfaction, to the bonus.

Answer: This is short-termism. Profit rises now, but future performance suffers. Balanced measures with a longer-term element would reduce the problem.

Example 2

Classify each as a leading or lagging indicator: (1) revenue for last quarter; (2) customer satisfaction score from a monthly survey; (3) hours of staff training completed. Which are leading?

Show the solution

Revenue for last quarter reports an outcome that has already occurred, so it is lagging.
Customer satisfaction usually predicts repeat sales and retention, so it is leading.
Training hours show investment in skills that should improve future quality and efficiency, so they are leading.
Choose the two that predict future performance.

Answer: Revenue is lagging. Customer satisfaction and staff training hours are leading indicators.

Exam tips

In multiple response questions, select exactly the stated number of options. Read the stem twice before picking.
Look for the key phrase in the scenario: this year only, bonus based on, or target must be met. These point to short-termism or manipulation.
For leading versus lagging, test with one question: has this already happened? If yes, it is lagging.
In short written answers, give the problem, the behaviour it causes and a remedy. Three linked points score better than a long list.
Do not rely on fixed lists alone. Apply the characteristics of good indicators to the scenario given.

Practice questions from Performance measurement - application

Performance Measurement Issues and Behavioural Aspects: frequently asked questions

What is short-termism in performance measurement?

It is focusing on short-term results at the expense of long-term success. A manager judged on annual profit may cut research, training or maintenance. Profit improves now but the business is weaker later.

How do performance measures cause dysfunctional behaviour?

Managers act to improve the measure they are judged on. If the measure is narrow or badly designed, they may take actions that help their own result but harm the organisation. Examples are rejecting good projects or ignoring quality.

What are the characteristics of good performance measures?

They should link to objectives, be controllable by the person judged, be measurable, clear, timely and fair. They should also be achievable. A balanced mix of financial and non-financial measures is better than a single figure.

What is the difference between lagging and leading indicators?

Lagging indicators report results that have already happened, such as profit or sales. Leading indicators give early signs of future results, such as customer satisfaction or order backlog. Good measurement uses both.