Morgan Corporation is a large, multi division manufacturing company. Each division is viewed as an investment center and has virtually complete autonomy for product development, marketing, and production.
Performance of division managers is evaluated periodically by senior corporate management. Divisional rate of return on capital employed is the sole criterion used in performance evaluation under current corporate policy. Corporate management believes that rate of return on capital employed is an adequate measure because it incorporates quantitative information from the divisional income statement and balance sheet in the analysis.
Some division managers complain that a single criterion for performance evaluation is insufficient and ineffective. These managers have compiled a list of criteria that they believe should be used in evaluating division managers' performance. The criteria include profitability, market position, productivity, product leadership, personnel development, employee attitudes, public responsibility, and balance between short-range and long-range goals.
Required:
(1) Discuss the shortcomings or possible inconsistencies of using rate of return on capital employed as the sole criterion to evaluate divisional management performance.
(2) Discuss the advantages of using multiple performance measures versus a single performance measure in the evaluation of divisional management performance.
(3) Describe the problems or disadvantages that can be associated with the implementation of a system of multiple performance measures as suggested by division managers.