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CMA Final · Strategic Performance Management and Business Valuation · Introduction to Performance Management

Kaveri Pharma Ltd reports that its division head met the profit target by cutting R&D and training spend sharply in the last quarter, while customer complaints and employee attrition rose. Which conclusion best reflects the scope of performance management?

Performance management should cover several dimensions and long-term value creation. Hitting a profit target by cutting R&D and training, while complaints and attrition rise, shows that a single short-term financial measure can mislead and encourage dysfunctional behaviour, so a balanced set of measures is needed.

  1. AThe division performed well because the profit target, the only agreed measure, was achieved
  2. BPerformance management should cover multiple dimensions and long-term value, so short-term profit alone can give a misleading, dysfunctional pictureCorrect
  3. CPerformance management should ignore non-financial indicators because they cannot be quantified
  4. DThe problem lies only with the employees who left, so the system needs no change

Explanation

Meeting a profit target by cutting R&D and training sacrifices future value, shown by rising complaints and attrition. A broad performance management scope balances financial and non-financial, short- and long-term measures. Judging by profit alone, as the first option does, encourages this dysfunctional behaviour.

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