## **Learning Outcomes**

This article explains how behavioural factors impact performance measurement, with a focus on the design of reward systems and the risk of unintended adverse outcomes. You will learn to identify the reasons for linking rewards to performance, understand common reward mechanisms, and evaluate how poorly designed systems can create negative behaviours such as short-termism or manipulation. You will be prepared to apply these concepts to practical exam scenarios.

## **ACCA Advanced Performance Management (APM) Syllabus**

For ACCA Advanced Performance Management (APM), you are required to understand the behavioural influences on performance management, especially how reward structures affect individual and organisational outcomes. Focus your revision on the following syllabus areas:

- The relationship between human resource management, performance measurement and suitable remuneration methods
- The link between achievement of corporate strategy and the management of human resources
- Evaluation of different methods of reward practices and their potential positive and negative consequences
- Common issues leading to dysfunctional behaviour (e.g., short-termism, manipulation)
- The risks of misaligned reward and measurement systems

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What is a potential consequence when a performance-related reward scheme only considers short-term financial results?
2. Which of the following is an example of 'measure fixation' in a reward system?
   a) Staff are rewarded for teamwork as well as sales  
   b) Only the number of units produced is rewarded  
   c) Employees receive recognition for process improvements  
   d) Quality of output is weighted equally with quantity
3. True or false? Performance targets should always be set as high as possible to drive maximum results.
4. Briefly state why controllability is important in setting performance-based rewards.

## **Introduction**

Performance measurement is not only about setting targets and recording results—it also shapes how people behave. Effective reward systems can motivate staff and align actions with organisational goals, but poorly designed rewards may encourage behaviour that damages long-term performance. Understanding the behavioural aspects linked to reward systems is critical for ACCA APM candidates, as exam scenarios often test your ability to spot and resolve misaligned incentives and their consequences.

> **Key Term: reward system**
> The structure of incentives and compensation within an organisation, used to motivate employees toward strategic and operational objectives.
>
> **Key Term: unintended consequences**
> Outcomes that are not foreseen or intended when designing a performance measurement or reward system.

## BEHAVIOURAL ASPECTS OF PERFORMANCE MEASUREMENT

### Reasons for Linking Rewards to Performance

Reward systems are designed to:

- Motivate employees to meet organisational goals
- Focus attention on tasks and outcomes that matter most
- Attract and retain skilled staff
- Strengthen desired behaviours and outcomes

When measurement and reward are linked, "what gets measured gets done"—but this relies on the chosen measures being both relevant and achievable.

### Types of Reward Systems

Common systems include:

- **Basic salary:** A fixed amount not linked to specific performance.
- **Performance-related pay (PRP):** Additional payment for achieving specific targets—these could be financial or non-financial.
- **Bonuses:** Lump-sum payments for achieving stated results.
- **Share options:** Long-term equity-based rewards aimed at aligning management with shareholders.
- **Commission:** Payment as a percentage of sales or profit.
- **Non-financial rewards:** Recognition, promotion, training, flexible working.

> **Key Term: performance-related pay (PRP)**
> A remuneration method where some or all pay is tied directly to attainment of predefined performance targets.

### Benefits of Linking Reward to Performance

Linking pay to measured results can:

- Improve motivation if targets are clear, fair, and achievable
- Align personal objectives with corporate goals
- Improve accountability and retention

However, the relationship only works if the measures are well designed.

## UNINTENDED CONSEQUENCES OF REWARD SYSTEMS

Even well-meant systems can go wrong, producing negative effects.

### Types of Adverse Outcomes

- **Short-termism:** Overemphasis on meeting immediate targets can result in neglect of long-term health or strategy.
- **Measure fixation:** Employees focus solely on rewarded metrics, ignoring wider priorities.
- **Tunnel vision:** Narrow attention on selected performance indicators at the expense of other important activities.
- **Gaming:** Manipulating results or behaviour just to meet targets and secure rewards.
- **Sub-optimisation:** Departments or individuals pursue actions beneficial for them but detrimental to the organisation as a whole.
- **Ossification:** Failure to update measures, which then become obsolete and lose effectiveness.

> **Key Term: short-termism**
> Excessive focus on immediate or short-range results at the expense of long-term objectives.
>
> **Key Term: gaming**
> Adjusting behaviour or results to maximise rewards, even if this undermines intended goals.

### Controllability Principle

People are de-motivated if they are held accountable—or rewarded—for outcomes beyond their control. For a reward to be effective, staff must be able to influence the results through their actions.

> **Key Term: controllability principle**
> The idea that individuals should only be judged and rewarded for results they have the power to affect.

## DESIGN PRINCIPLES FOR EFFECTIVE REWARD SYSTEMS

To prevent negative consequences, reward systems should:

- Set Specific, Measurable, Achievable, Relevant, and Time-bound (SMART) targets
- Use a balanced mix of financial and non-financial measures
- Include only controllable performance factors
- Limit the number of targets to avoid confusion or dilution
- Review and update performance metrics regularly
- Clearly communicate how performance is assessed and rewarded

### **Worked Example 1.1**

**Scenario:**  
A technology company rewards sales managers with generous quarterly bonuses based entirely on revenue growth. Managers achieve targets by heavily discounting products to boost short-term sales, resulting in high revenue but low profit margins.

**Question:**  
What unintended consequences has this reward system created?

> **Answer:**
> The reward system has led to 'short-termism' and 'measure fixation', with managers focusing on revenue growth at the expense of profitability and long-term customer relationships. The result is a possible decline in strategic value and overall company health. The system also encourages manipulation (discounting) to hit targets.

### **Worked Example 1.2**

**Scenario:**  
A hospital pays its department heads a bonus based on the number of patients treated per month. Some departments reduce the time spent per patient and prioritise routine cases over complex ones to maximise throughput.

**Question:**  
What is the risk here, and how could the reward system be improved?

> **Answer:**
> The focus on quantity leads to gaming and reduced quality of care. Short-term targets override the actual mission of patient well-being. A better system would include patient satisfaction and quality indicators, not just volume treated.

### **Exam Warning**

> In APM exam scenarios, always question whether the reward system encourages the right behaviours. Beware of measures that are not aligned to the strategic mission or which staff cannot control. If manipulation or dysfunctional behaviour arises, recommend alternative reward structures.

### **Revision Tip**

> For scenario questions on rewards, explicitly state whether targets are SMART and controllable. Always comment on both benefits and risks of a given system.

## **Summary**

Behavioural factors play a major role in performance measurement and management. Carefully designed reward systems can motivate employees and support organisational objectives. However, poorly chosen metrics or an over-focus on short-term, easily measured outcomes may create serious adverse consequences, including manipulation, loss of motivation, and value destruction. ACCA APM candidates must be able to spot these issues and propose balanced solutions that align measurement, rewards, and strategy.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain why organisations link reward systems to performance measures
- Identify common types of reward systems and how they function
- Recognise the controllability principle and why it matters
- List and explain types of unintended consequences, including short-termism and gaming
- Apply tests for SMART and balanced measurement
- Recommend improvements to avoid dysfunctional employee behaviours

## **Key Terms and Concepts**

- reward system
- unintended consequences
- performance-related pay (PRP)
- short-termism
- gaming
- controllability principle

Behavioural aspects of performance measurement - Reward systems and unintended consequences