What are the problems of only using financial performance indicators for measuring the performance of a company?
Short termism vs long term performance
Linking rewards to financial performance may tempt managers to make decisions that will improve short term financial performance but may have a negative impact on long term profitability. E.g. they may decide to cut investment or to purchase cheaper but poorer quality materials.
Manipulation of results
In order to achieve the target financial performance and hence their reward, managers may be tempted to manipulate results, for example delaying a provision or accrual to achieve better financial results
Do not convey the full picture
The use of only financial performance indicators has limited benefit to the company as it does not convey the full picture regarding the factors that will drive long term profitability, e.g. customer satisfaction, quality.
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