A culture of systemised performance appraisal for all staff should be embedded in all organisations. The appraisal of a Chief Executive Officer’s (CEO) performance should equally be systemised – this sends a strong message to all staff and other stakeholders that performance evaluation of all is central to organisational accountability and achievement.
Unlike other staff, the Board is the entity that provides evaluation and feedback to a CEO – this is one of the Board’s essential duties. With regular and systematic evaluations, areas in the CEO’s performance that need improvement can be identified, and addressed (preferably quickly), to the benefit of the organisation and the CEO.
Interestingly, Rivero and Nadler* found that “the more senior the executive (and) the greater their impact on the organisation performance, the less rigorous the evaluation process..front-line supervisors are subjected to yearly painstaking reviews in which they’re systematically graded on a detailed set of performance goals. As you go up the ladder, the reviews become more conversational, informal, and sometimes downright perfunctory”.
What to evaluate CEO performance against?
It is surprising how many organisations struggle to answer this question. Key performance indicators (KPIs) should be set, in agreement with the CEO, at the commencement of their employment and then reviewed regularly at least half yearly (more often if a major change is being undertaken).
Those KPIs should align with organisational strategy, and have an element of “stretch” to them – that is, they make the CEO go that bit beyond their comfort zone to achieve.
What and how many KPIs?
The number and type of KPIs should be sufficient to cover the most important outcomes expected of the CEO, but not so many that the CEO spends her working day measuring her performance. Overall, less is always best, but ensure the KPIs chosen are clear, targeted and objectively measurable.
While financial and other operational metrics are more easily measured, qualitative metrics, such as organisational reputation, building stakeholder relationships and leadership skills, are more difficult. Although not easy, the Board must grapple with how to measure such qualitative measures, be it through a staff survey, focus group feedback, or other similar methodologies.
The Board should also ensure the KPIs are well-rounded and don’t focus on one element of leadership or management, to the detriment of other factors. A KPI that evaluates each of the following areas should suffice: achievement of strategy, leadership ability, respectful management of staff, other stakeholder relationships and engagement, organisational reputation and/or profile, and effective implementation of compliance and systems (for example, financial sustainability and risk management).
How to obtain Objective Information for the Evaluation
Various sources of information and methods for obtaining objective information can be considered. Input could be obtained from some or all Board members, groups or individual staff members, and other stakeholders (clients/customers, partners, funders and regulators are examples), along with the CEO’s self-assessment.
Interestingly, despite a wider trend of increased use of 3600 evaluation methodology in HR performance management, few organisations seek input from staff who directly report to the CEO. However, this is one of the few ways that the impact of the CEO’s personal behaviours and leadership style can be objectively assessed. By seeking feedback from a range of individuals who have different relationships with the CEO, the Board can obtain information on how the CEO conducts herself. For example, some CEOs may be very good at “managing up” to the Board, but are bullying and disrespectful in interactions with those staff that report to them . Without making the effort to gather information from a range of sources, the Board may not obtain objective information about the CEO’s leadership style.
Evaluation Not Remuneration
While CEO performance evaluation often feeds into remuneration review and decisions, the Board needs to determine whether performance will be incentivised – that is, if performance is at or beyond the expected standard, will the CEO will be rewarded in some way (usually through increased remuneration or bonuses, share options or similar).
However, once a financial element is introduced into the evaluation process, the monetary focus will undoubtedly overshadow the purpose of evaluation – to instigate deliberative discussion and reflection, to build on an employee’s strengths, and address an employee’s weaknesses.
If your organisation routinely links CEO (and other staff) performance evaluation to remuneration there is little scope to factor in other matters that should be considered when making remuneration decisions, such length of employment (as an indicator of staff loyalty), achievement of industry awards or honours (which reflect well on the organisation, as well as the individual employee), and the most important indicators of the general economy, market conditions within the industry or sector the organisation operates, and the financial position of the individual organisation. If the organisation is unable to offer pay increases simply because it cannot afford it, then raising expectations that every satisfactory performance evaluation results in remuneration increase are risky.
Does your Board need support or advice in evaluating the performance of the CEO? Faileen James is passionate about transparent, equitable performance management which focuses on accountability and organisational success. Contact Faileen to assist you in this often difficult area of Board responsibility.
*Rivero, J. C. & Nadler, M. B., CEO performance evaluation, In Building Better Boards: A Blueprint for Effective Governance, Jossey-Bass, 2006