Some companies use financial measures, such a return on assets, to evaluate the
ID: 2632273 • Letter: S
Question
Some companies use financial measures, such a return on assets, to evaluate the performance of divisions, managers, and even individual employees. There are certainly risks associated with such a practice. Can you think of or locate an example where a company evaluating this way could actually encourage the opposite of the behavior that they intended to promote among its employees? What might an employee do if their raise or bonus depended on a single financial measure? Some companies use financial measures, such a return on assets, to evaluate the performance of divisions, managers, and even individual employees. There are certainly risks associated with such a practice. Can you think of or locate an example where a company evaluating this way could actually encourage the opposite of the behavior that they intended to promote among its employees? What might an employee do if their raise or bonus depended on a single financial measure?Explanation / Answer
Can you think of or locate an example where a company evaluating this way could actually encourage the opposite of the behavior that they intended to promote among its employees?
Yes, this happened where I used to work. The ration can be made to look good by raising the return (which is what the company wants) or by keeping the return the same and selling off assets of valuing them lower. By only measuring this ratio, the company is opening itself to management and employees manipulating the metric so that it looks good when it may in fact just be a result of lowering valuation of assets rather than actually increasing rate of return.
What might an employee do if their raise or bonus depended on a single financial measure?
Manipulate the metric and over focus efforts on making it look good to get a bonus when in reality not doing the best for the company as a whole. For example, where I worked management was measured on inventory levels. To manipulate the numbers inventory would sometimes be scrapped early to sent from one department to another.
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