“I must leave now”, said Swami, my South Indian friend just as we were sipping our coffee.
“Going out with family?” I asked, knowing that he was quite the family man.
“No! Don’t ask – I have this big form I have to fill after going home, and submit it tomorrow without fail”, he said.
“Hmm – something to do with your son’s school I guess. Then you better go”, I said.
“Arre – nothing like that boss! In fact, it is about the boss! I have to go home and fill my performance appraisal form, listing all that I did in the year and ensure my boss gets it by tomorrow, so that he can rate my performance! You know how this corporate thing works. You have to do this every year. I am sick of it – but kya kare? Will not get my increments and bonus if I don’t fill that form!”, an aggravated Swami said. I guess my repeated questions on why he was leaving our weekend coffee discussion early had clearly pressed the wrong button.
“Your annual appraisal system is part of the problem in our markets also”, interjected Jigneshbhai, my broker friend.
I was a bit surprised with that. I could not quite figure out how Jigneshbhai had an opinion on that too. I could see the same reaction on Swami’s face. But before we could ask anything, Jigneshbhai continued, “So your performance is also measured once every year?”
“Yes, they say they will do it twice every year, but happens only once. Increments are only given once a year”, confirmed Swami, with a sore face. Somehow the word ‘increment’ used in corporate circles seemed like a well devised tactic to set expectations on the size of salary raises, and that expectation seemed quite evident on Swami’s face.
Be that as it may, but Jigneshbhai went ahead making his point on how they were a problem.
“You see, as the time for filling your appraisal form comes near, I am sure people start frantically showing evidence of their performance? Like finishing up more projects, telling the bosses what they are doing and generally being more active?”
“Yes – that is right, more or less. But it is not fair to everyone, you know. Sometimes the good people get bad ratings, and bad ones get good ratings”, reaffirmed Swami, still having his issues with the appraisal process.
“Well life is not always fair. But this appraisal thing affects fund managers and institutions also. They know that the time for the measurement of their performance is near. So every fund wants to beat every one else.” Jigneshbhai had a good understanding of psychology.
“So what do they do?” asked Swami almost innocently.
“Well, I am not sure, but I guess it should be, more or less, what you are doing. Some researcher said that’s the reason markets fall in December. So that relative performance can be shown for the year. And then rise in January when they get fresh money”, explained Jigneshbhai in his nonchalant style. Sensing the surprise, he continued, “Of course, you cannot profit from it. When everyone wants his appraisal form to look good, this stops happening.”
This was not good to hear. And it also left Swami both alarmed and confused as usual. “Hmm, so they are playing games at the expense of my money”, he thought, but did not say it in those many words. Instead, always looking for simpler answers, he asked “So even they are working for increments. So, what are you saying? Stop investing in funds?”
“Of course not, you cannot change that”, resumed Jigneshbhai. “But you can become an appraiser once a year – of the fund manager of your mutual fund. And unlike corporates where every year performance is relative to others, in markets, you have an absolute against whom to measure his performance – the market index. Put him on a performance improvement plan if he cannot beat the market index. If it still does not improve after a year or two, sack him and move your money to a low-cost Index fund.”