Pensions & Performance Measurement

Crisis Compels Economists To Reach for New Paradigm - WSJ.com#mod=todays_us_page_one: "The result was a new orthodoxy, known as 'rational expectations,' that still dominates, underpinning everything from the way pension funds invest to how financial analysts put values on securities."

In the same edition, some of the ways pension benefits can be manipulated was demonstrated along with the lead story about executive pensions rising in 2008 despite horrific company performance.

While pension calculations are not in the purview of today's performance measurement professionals, the idea of manipulating formulas is. Whether it is the underlying benchmark selection for attribution analysis or the choice of risk-free rates or pricing sources for securities, these inputs provide a substantial impact on the final product. The performance professional needs to be cognizant of the firmness of the foundations of his work before providing this data to the end user.

Taking Candy From A Baby

White House Tally Appears to Overstate Stimulus Jobs - WSJ.com: "Some Head Start preschool programs reported that stimulus money saved the job of every staff member who received a cost-of-living pay raise, according to their filings. Some colleges and universities counted every part-time student work-study position as a full-time job, according to their reports, which are published online at recovery.gov."

This really feels like piling on, but this measurement issues for the stimulus' effects offers an extreme example of what can happen when there are no performance standards involved. In an increasing quantitative world combined with demographic and fiscal inevitabilities, this may be the impetus to expand the expertise of performance measurement professionals from investment management to other less obvious fields.

Preaching To The Choir: Losses Are Harder To Recover

One Way to Dig Out of a Hole - WSJ.com: "If an investment declines 10%, it takes about an 11% gain to break even (assuming you don't pump in additional dollars). If the drop is 20%, you need a 25% gain to recover. A fall of one-third requires a rebound of 50%. And if your investment falls by half, 'you need a double,' or a 100% return, says Mr. Wiener, the New York-based editor of the Independent Adviser for Vanguard Investors. The recovery percentages grow exponentially because you have so few dollars working for you after a big loss."

This is the basic idea behind Nassim Taleb's Black Swan Theory. However, human nature is not wired to think about percentage gains and losses. One of the key areas performance measurement professionals can add value to the marketing process is working with the sales team to help them clearly demonstrate this.