In November of 2016, a joint study from the State Street Center for Applied Research and the CFA Institute was released claiming to have discovered “the hidden variable of performance”. They called this variable “Phi” and it is a combination of the motivational forces of Purpose, Habits, and Incentives. Specifically, the found that a one-point increase in Phi was associated with 28% greater odds of excellent organizational performance, 55% greater odds of excellent client satisfaction, and 57% greater odds of excellent employee engagement.
In this guest post, Derek Tharp – our new Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – analyzes the Phi study and delves deeper into exactly what it is, how it is measured, and what conclusions might be drawn from this study.
In an 18-month study, the State Street Center for Applied Research and the CFA Institute combined findings from 200 in-depth interviews with global industry leaders and a survey of 3,300 “investment professionals” (which was broadly comprised of various executives and employees of asset managers, asset owners, financial advisors, central bankers, regulators, policy makers, and others) from 20 different countries. Participants were asked questions about organizational performance, client satisfaction, and employee engagement — as well as questions about their own purpose, habits, and incentives. As a result of these questions, researchers found a statistically significant relationship between Phi and organizational outcomes, client satisfaction, and employee engagement.
Unfortunately, however, it appears that some of the reporting on Phi may have been overhyped. Specifically, if we take a closer look at the methods utilized in this study, it doesn’t actually evaluate organizational performance, client satisfaction, or employee engagement! Instead, the researchers evaluated self-reported assessments of organizational performance, client satisfaction, and employee engagement. And this distinction is meaningful, because it isn’t exactly clear that employees make valid or reliable assessments of organizational performance, client satisfaction, or employee engagement — and especially when these employees may not actually even know if clients’ goals are being met (how “organizational performance” was defined), whether clients or satisfied, or whether other employees within a large multinational financial services firm are actually even engaged!
In the end, the study did ask some interesting questions and set out with some lofty ambitions. What the researchers set out to do was not easy and they went after some big questions, so they can be commended for that, but until further research can tie Phi to actual outcomes or provide evidence that the self-reported measures are assessing something meaningful in a valid and reliable way, then the conclusions we can actually draw from the Phi research are limited.