## Learning Outcomes

After reading this article, you will be able to explain the importance of ethical behaviour, professional judgement, and effective communication of performance in performance management. You will understand how ethics, judgement, and stakeholder interests influence manager actions, reporting, and decision-making. You will also learn to recognise and address common behavioural issues and apply clear communication to improve performance review in an ACCA context.

## ACCA Performance Management (PM) Syllabus

For ACCA Performance Management (PM), you are required to understand ethical and behavioural considerations when exercising professional judgement and communicating performance. Specifically, you should be able to:

- Recognise ethical principles and threats in performance management scenarios
- Explain the application of professional judgement in analysing and reporting performance
- Identify behavioural factors that influence decision-making and reporting
- Recommend strategies for effective communication of performance to different stakeholders

## Test Your Knowledge

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

1. What is the main purpose of applying professional judgement when evaluating divisional performance?
2. Which threat to ethical behaviour is most likely when a manager manipulates a report to meet a bonus target?
3. Why is it important to distinguish between controllable and uncontrollable factors when assessing manager performance?
4. State two factors that affect how managers communicate performance results to stakeholders.

## Introduction

Performance management is not just about numerical results; it also involves human behaviour and ethics. Managers must exercise professional judgement to ensure that assessment and reporting of performance is both fair and transparent. Ethical pressures, stakeholder interests, and behavioural incentives all influence how information is evaluated and communicated. Understanding these factors is essential to support accurate decision-making and uphold trust in the organisation.

> **Key Term: Professional judgement**
> The process by which qualified individuals use their professional knowledge, experience, and ethical standards to make decisions or recommendations where standards or rules may not provide clear answers.

### ETHICAL CONSIDERATIONS IN PERFORMANCE MANAGEMENT

Ethical behaviour is fundamental in performance management. It refers to choosing actions that are honest, fair, and consistent with professional codes even when commercial pressure or personal interests may tempt otherwise.

Managers face various threats to ethical behaviour, such as:

- Self-interest (personal gain, such as bonuses)
- Familiarity (close relationships clouding decisions)
- Intimidation (pressure from superiors or peers)
- Advocacy (acting on behalf of another party instead of being objective)

If not recognised and managed properly, these threats can lead to manipulation of results, biased reporting, or even misrepresentation of performance.

> **Key Term: Ethical threats**
> Circumstances or relationships that may compromise a person's ability to act objectively and in accordance with professional standards.
> **Key Term: Controllability principle**
> The concept that managers should only be held responsible for results they have significant influence over.

### USING PROFESSIONAL JUDGEMENT

Professional judgement is required whenever a decision cannot be made by simple rule or formula. This includes:

- Deciding which performance measures are most relevant
- Adjusting results for factors outside managers' control
- Balancing short-term results with long-term impact
- Determining whether to flex budgets or revise standards

A manager demonstrates professional judgement by weighing facts, assessing evidence, and making choices free from bias or undue pressure. This ensures that reported performance reflects reality, supports fair evaluation, and reduces the risk of ethical breaches.

### Worked Example 1.1

A divisional manager is assessed on profit performance. During the year, a sudden increase in material prices—driven by global shortages—impacts costs. The manager could not have anticipated or prevented this increase.

**Question:** Should this cost variance be included in the appraisal of the manager's performance?

> **Answer:**
> Applying professional judgement, the increase is outside the manager's control. To avoid unfairly penalising the manager, adjust the performance report to remove the uncontrollable variance. This supports both ethical conduct and effective motivation.

### BEHAVIOURAL INFLUENCES ON PERFORMANCE COMMUNICATION

Performance management is shaped by how individuals react to systems, targets, and appraisal. Common behavioural influences include:

- Setting difficult or unfair targets may demotivate staff
- Emphasis on short-term financial results can lead to manipulation
- Linking rewards too closely to single indicators risks dysfunctional behaviour, such as "hitting the number but missing the point"
- Lack of participation in target setting reduces ownership and morale

When reporting results, how information is communicated can influence perceptions and actions. Clear, objective communication builds trust and encourages constructive responses, while ambiguous reporting may cause confusion, blame, or mistrust.

> **Key Term: Performance communication**
> The structured process of delivering clear, accurate, and understandable information about results to those who need it.

### EFFECTIVE COMMUNICATION OF PERFORMANCE

When presenting performance results—internally or externally—a manager should:

- Use clear, jargon-free language appropriate for the audience
- Focus on facts and evidence, not personal opinions
- Distinguish between past results and future actions
- Make adjustments for extraordinary or uncontrollable events explicit
- Ensure transparency in the basis for assessment, including any changes to targets or standards

This not only supports ethical standards, but also helps stakeholders understand the true position and contribute meaningfully to improvement.

### Worked Example 1.2

A finance manager is preparing a performance report for a production manager. Actual costs were higher than budgeted due to a government-mandated minimum wage increase.

**Question:** How should the finance manager communicate this result?

> **Answer:**
> The report should highlight that the wage increase was externally imposed and outside the manager’s control. Separate lines or notes should show the impact. This ensures the communication is fair, transparent, and encourages appropriate action.
>
> **Exam Warning:**
> Managers are often unfairly blamed (or credited) for events they cannot influence. When appraising results or communicating variances, always clarify which factors were controllable, and which were not. Failing to do so risks demotivating managers and distorting decision-making.

### PRACTICAL ISSUES AND COMMON PITFALLS

Even with good intentions, common ethical and behavioural problems that arise in performance management include:

![Professional judgement in performance evaluation through objectives, evidence, ethical threats, bias identification, controllability principle, option appraisal, and documented rationale.](https://static.pastpaperhero.com/images/acca-pm-ethical-and-behavioural-considerations-professional-judgement-and-communication-of-performance_00.png)

_Professional judgement is structured as sequential analysis of facts, ethical threats, controllability, strategic trade-offs, and final documentation._

- Overly rigid adherence to standards, resulting in loss of flexibility and relevance
- Adjusting targets mid-period to mask poor results ("moving the goalposts")
- Not disclosing changes or exceptional items in performance reports
- Focusing solely on quantitative indicators, ignoring qualitative or sustainable outcomes

To minimise these pitfalls:

- Apply judgement to distinguish between “fair” and “unfair” influences on results
- Encourage open discussion about the basis for targets and results
- Use a combination of financial and non-financial measures

> **Revision Tip:**
> In the exam, always explain your reasoning if you believe a reported variance should be treated as uncontrollable or adjusted for external factors. Showing sound professional judgement can gain marks even if your final numbers are estimates.

## Summary

Ethical and behavioural considerations are central to fair and effective performance management. Professional judgement ensures that evaluations and reports reflect both results and context, upholding both ethical standards and organisational objectives. Clear, transparent communication of performance, including the influence of uncontrollable factors, leads to better motivation, decision-making, and trust.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- The importance of ethical behaviour and identifying threats in performance management
- The need for and application of professional judgement in evaluating and reporting performance
- Recognition of the controllability principle when assessing managers
- Behavioural impacts on performance systems and communication
- Best practices for communicating performance results clearly and fairly

## Key Terms and Concepts

- Professional judgement
- Ethical threats
- Controllability principle
- Performance communication


Ethical and behavioural considerations - Professional judgement and communication of performance