Ed’s Daily Notes for November 14th   7 comments

Bloomberg: Yellen Says Economy Performing ‘Far Short’ of Potential

If you are looking for an excuse to be bullish, here you go:

Janet Yellen, nominated to be the next chairman of the Federal Reserve, signaled she will carry on the central bank’s unprecedented stimulus until she sees improvement in an economy that’s operating well below potential.

“A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases,” Yellen said in testimony prepared for her nomination hearing before the Senate Banking Committee today in Washington. “Supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”

…In three pages of prepared remarks for the 10 a.m. hearing, released yesterday, Yellen, 67, said unemployment is “still too high, reflecting a labor market and economy performing far short of their potential,” and that inflation is expected to remain below the Fed’s 2 percent goal. She also highlighted areas where the economy has improved, saying housing “seems to have turned a corner” and the auto industry has made an “impressive comeback.”

Business Week: Yahoo’s Latest HR Disaster: Ranking Workers on a Curve

Jack Welch lives!

If Marissa Mayer is as good at identifying winning startups as she is at embracing contentious human resources practices, Yahoo! (YHOO) is going to be just fine. Several months after the great work-at-home kerfuffle of 2013, Yahoo employees were up in arms about a new policy that forces managers to rank employees on a bell curve, then fire those at the low end. According to AllThingsD, Marissa Mayer reportedly told Yahoo workers that the rankings weren’t mandatory, but many people disagree. The company hasn’t responded to a request for comment.

With its embrace of rankings, Yahoo has waded into the “third rail of human resource management.” Forcing managers to rank their employees along a bell curve was popularized in the 1980s (thanks, Jack Welch), but lately it has fallen out of favor. The Institute of Corporate Productivity says the number of companies using either a forced ranking system or some softer facsimile is down significantly from previous years. Companies performing well were less likely to be using forced ranking systems than those that weren’t. Just over 5 percent of high-performing companies used a forced ranking system in 2011, down from almost 20 percent two years earlier.

Basically, many people have lost faith that ranking employees works, and some research suggests that employee performance doesn’t follow a bell curve at all. Instead, most people are slightly worse than average (PDF), with a few superstars. And while a bit of pressure can motivate people, constantly pitting employees against one another is terrible for morale. In a company that is going through layoffs, this gets worse over time (PDF), wrote several MIT professors in a study of forced rankings in 2006. “As the company shrinks, the rigid distribution of the bell-curve forces managers to label a high performer as a mediocre. A high performer, unmotivated by such artificial demotion, behaves like a mediocre.”

When I worked at Bank of America, they used a similar system, and the description of the effects in the article above are fairly accurate. However, utilized over a period of a year, absolutely no more than two years, and it can have the positive effect of weeding poor performers from your company.

My own view is this kind of system can work, but upper management needs to split the bell curve into high performing groups versus low performing groups. In other words, allow higher averages for the high performing groups. However, even then, this kind of rating system is subject to cronyism, so I would still be reluctant to use it for a long period of time.

Overall, I would call this a questionable move by Marissa Mayer. However, if she is still faced with an under-performing company, and Yahoo’s recent results could be interpreted that way, this can be a means to shake up things.

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Posted November 14, 2013 by edmcgon in Economy, Federal Reserve, News, Stocks

7 responses to “Ed’s Daily Notes for November 14th

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  1. Ed

    Is yellen bullish for gold and silver?

  2. I was at a company that used the bell curve idea of raises. And they also decided to push it all the way down. So here you are a manager of a group of say 5 people, and you have to put a bell curve on them to decide who doesn’t get a raise and such.

    This kind system means that if you actual form a top notch group they get penalized. Much better to “average” in a mediocre group than to be an “outstanding” person in in “outstanding” group.

    • Chris,
      I agree entirely! If it is done evenly across the board, it only encourages mediocrity. I would hope Yahoo tweaks it, along the lines I mentioned, but there is no telling. Frankly, I’m concerned.

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