CMA Final · Strategic Performance Management and Business Valuation · Introduction to Performance Management
Kaveri Textiles Ltd budgeted sales of Rs 50 lakh and achieved Rs 56 lakh, while the production manager was told to hold cost per metre at Rs 80 and actual cost per metre was Rs 84. The CEO praises the sales head and wants the production manager penalised, although a sharp rise in cotton prices, which neither controls, caused the cost increase. Which principle of performance management is most directly being ignored?
The principle being ignored is controllability: managers should be judged on results they can influence. The cost overrun came from an external cotton price rise beyond the production manager's control, so penalising him distorts evaluation and may demotivate him, regardless of how other measures are designed.
- AEvaluating managers only on factors they can control (controllability)Correct
- BLinking measures to a balanced scorecard perspective
- CUsing non-financial measures along with financial ones
- DSetting stretch targets for all managers
Explanation
The cost overrun arose from cotton prices, which the production manager cannot control. Sound performance evaluation separates controllable from uncontrollable factors. The other options may be useful practices, but they do not address the unfairness in this situation.
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