Why Killing Performance Reviews Was a Mistake
The Performance Review Revolution of 2016
2016 was the year of many themes in business, probably most notably people freaking out about artificial intelligence and what that means for everyone. But it was also the year that a lot of people started discussing -- maybe not yet acting on -- how ridiculous the once-a-year performance review is. Apparently 70% of enterprise companies, including some legacy ones like GE, are considering changing their approach to performance reviews. Headlines scream from the rafters: “Is it time to kill performance reviews?” and “Five reasons to abandon the performance review.”
This isn’t surprising: studies have shown for years that people hate performance reviews, and that includes both employees (receiving) and managers (giving). I’m not going to belabor the reasons people hate them here; I think you’re all smart enough to see those. They’re usually low-context, rushed, and more about process/checking boxes than actually trying to develop the employee in question.
The Unintended Fallout
Well, as noted above, some companies are outright removing them. But … there’s a bit of an issue:
At firms where reviews had been eliminated, measures of employee engagement and performance dropped by 10%, according to CEB’s survey of nearly 10,000 employees in 18 countries. Managers actually spent less time on conversations, and the quality of those conversations declined. Without a scoring system to motivate and give structure, performance management withered. As one manager told CEB: “When I gave someone a low score in the past, I felt responsible for helping them out, now I just don’t feel that I have to spend time doing that anymore.”
So basically: companies are eliminating performance reviews because they see the flaws (or think they’re too time-consuming), and they’re replacing them with … nothing? And by doing that, managers are actually having less conversations? And those conversations are decreasing in quality? Egad.
The Problem Still Remains...
Unfortunately, most managers think of themselves as “Mr. (or Mrs.) Productivity”. They view their direct reports as numbers -- x-amount of KPIs achieved. This is unfortunately because a lot of our “management theory” comes from a 1911 book by Frederick Winslow Taylor. Henry Ford was competing with horses then, and now we have self-driving cars -- but we still design management best practices the same way. Insane.
The once-a-year review is great for lazy managers. You can essentially ignore your employees all year (except for when they screw up), have one elongated conversation with them, and pat yourself on the back about how great a leader you were. Organic feedback is much harder. It requires time, effort, eye contact, communication, genuine interest, emotional intelligence, conversational skills, and more. This is hard for a lot of managers. Do they know that it’s important? And if they do, who’s making sure that they have the training necessary to execute the feedback appropriately?
If you’re going to replace an annual performance review (which you should, because the rest of our economy is on-demand), you need to replace it with legitimate, consistent feedback. Issue: feedback is very rare in most offices, which is largely because it’s a very direct form of communication that we nonetheless root in many assumptions.
So What are We to Do?
This is the bottom line: work is most functional when clear priorities exist, those priorities are aligned with task work, and the people doing the task work get consistent feedback on how it’s going and if priorities are shifting. When we impede any of those three steps, work becomes confusing and challenging for all.
Aside from training managers better and contextualizing for them that their job is about developing talent and not just hitting KPIs, one easy solution is the 90-day review. 90 days is about a quarter -- which is how most companies tend to think -- and it provides a good time to take stock of how an employee is doing. It also feels less overwhelming to super-busy middle managers. We’ve still got a long way to go on how best to give feedback and evaluate employees, but every quarter is better than a once-a-year process choked in HR jargon.
What are your thoughts on the value of performance reviews and adopting my proposed 90-day review process?
Building a Better Index With Strategic Beta
Written by: Yazann Romahi, Chief Investment Officer of Quantitative Beta Strategies and Lead Portfolio Manager of JPMorgan Diversified Return International Equity ETF at J.P. Morgan Asset Management
With the global economy warming up, but political uncertainty remaining a constant, it’s more important than ever for investors to position their global portfolios to navigate long-term market volatility. That’s where the power of diversification comes in, says Yazann Romahi, Chief Investment Officer of Quantitative Beta Strategies at J.P. Morgan Asset Management and Lead Portfolio Manager of JPMorgan Diversified Return International Equity ETF (JPIN).
Not all diversified portfolios are alike
In their search for diversification, many investors turn to passive index ETFs, which track a market cap-weighted index. But these funds aren’t always the most effective way to steer a steady course through volatile markets—and there are two key reasons why.
First, traditional market cap-weighted indices are actually less diversified than investors may think. For example, in the S&P 500, the top 10% of stocks account for half the volatility of the index. Within sectors, while you might assume that sector risk is distributed across the ten major sectors fairly evenly, it is a surprise to many that at any point in time, one sector can be as high as 50% of the risk.
Second, cap-weighted indices come with some inherent weaknesses, including exposure to unrewarded risk concentrations and overvalued securities. So, while these indices provide investors with exposure to the equity risk premium and long-term capital growth, as is the case with any other investment, investors can also experience painful downturns, which increase volatility and reduce long-term performance. For investors seeking equity exposure with broader diversification—and potentially lower volatility—strategic beta indices may be better positioned to deliver the goods.
How do we define strategic beta?
Strategic beta refers to a growing group of indices and the investment products that track them. Most of these indices ultimately aim to enhance returns or reduce risk relative to a traditional market cap-weighted benchmark.
Building on decades of proven research and insights, J.P. Morgan’s strategic beta ETFs track diversified factor indices designed to capture most of the market upside, while providing less volatility in down markets compared to a market cap-weighted index. Rather than constructing an index based on market capitalization—with the largest regions, sectors and companies representing the largest portion of the index—our strategic beta indices aim to allocate based on maximizing diversification along every dimension—sectors, regions and factors. The index therefore seeks to improve risk-adjusted returns by tackling the overexposure to risk concentrations and overvalued securities that come as part of the package with traditional passive index investing.
So, how do you build a better index?
As one of just a few ETF providers that combine alternatively-weighted and factor-oriented indices, our disciplined index methodology is designed to target better risk-adjusted returns through a two-step process.
First, we seek to maximize diversification across the risk dimension. This essentially means that we look to ensure risk is more evenly spread across regions and sectors, which balances the index’s inherent concentrations. As uncontrolled risk concentrations are unlikely to be rewarded over the longer term, we believe investors should strive for maximum diversification when constructing a core equity exposure.
Second, we seek to maximize diversification across the return dimension. Research shows that there are a number of sources of equity returns beyond growth itself. These include risk exposures such as value, size, momentum and quality (or low volatility). When creating a diversified factor index in partnership with FTSE Russell, we seek to build up the constituents with exposure to these factors. We therefore select securities through a bottom-up stock filter, scoring each company based on a combination of these return factors to determine whether it is included in the index. These factors provide access to a broader, more diversifying source of equity returns as they inherently deliver low correlation to one another, providing diversification in the return dimension.
So, whereas traditional passive indices allow market cap to dictate allocations, the diversified factor index seeks to ensure that we minimize concentration to any source of risk—whether it be region, sector or source of return.
How are you currently weighted versus the market cap-weighted index, and how have your under- and over-weights enhanced risk-return profiles?
Crucially, our weightings don’t reflect specific views on sectors or regions and are instead, by design, the point of maximal diversification. It is important to remember that market cap-weighted indices typically carry a lot of concentration risk—for example, at various points in time, a single sector can explain half the risk of the index when left unmanaged. At the moment, three sectors explain two-thirds of the risk of the FTSE Developed ex-NA Index—these being financials, consumer goods and industrials. In contrast, the FTSE Developed ex-NA Diversified Factor Index—or strategic beta index, which JPMorgan Diversified Return International Equity ETF (JPIN) tracks—is explicitly designed to maintain balance and therefore these sector allocations range from 8% to 12%. In the short term, any concentrated portfolio can of course outperform a more diversified one, if the concentrated bet paid off.
Investing wholly in a single stock may outperform over short-term periods. At other times, it may significantly underperform an index. However, it is well understood that an investor is better off diversifying across lots of stocks for better risk-adjusted long-term gains. The same applies here. From a pure return perspective, if financials, for example, account for half of a cap-weighted index in terms of market cap and have a strong run over the short term, of course, this index would outperform over this period. Over the long run, however, it is fairly uncontroversial to suggest that the more broadly diversified index could achieve better risk-adjusted returns.
Seeking a smoother ride in international equity markets?
For investors targeting enhanced diversification through a core international equity portfolio, JPMorgan Diversified Return International Equity ETF (JPIN) targets lower volatility by tracking an index that more evenly distributes risk, enabling them to get invested—and stay invested.
Learn more about JPIN and J.P. Morgan’s suite of strategic beta ETFs here.
Call 1-844-4JPM-ETF or visit www.jpmorganetfs.com to obtain a prospectus. Carefully consider the investment objectives and risks as well as charges and expenses of the ETF before investing. The summary and full prospectuses contain this and other information about the ETF. Read them carefully before investing.
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