An analysis of dysfunctions and biases in financial performance measures

Financial performance measures are often criticised for being biased measures of a company's true performance and setting the wrong incentives. Modern performance measurement systems hence focus not only on financial measures but try to plan and control the firm in a more balanced way by using other measures as well. Despite the weaknesses of financial measures, modern concepts of performance measurement cannot completely renounce on financial measures. In this paper, some important problems of financial measures are analysed and it is attempted to find solutions for the problems. It is concluded that many of the problems are the result of a poor understanding or application of the measures and that they can be avoided by making the right adaptations or using different methods. The paper is based on a literature review on common dysfunctions and biases in financial performance measures complemented by own analyses, discussions and comments.