On a high-level, the process for planning and evaluating CEO performance is relatively straight forward.
But what about the nuances that play a huge role in determining the value gained from the process?
How the performance expectations and evaluation criteria are set, assessment is completed, Board is engaged in discussing results, and how feedback is delivered and discussed with the CEO?
Here are five guiding principles for realizing the benefits of an effective CEO evaluation process.
Make it a collaborative process between the CEO and board.
While the board owns ultimate accountability for designing and managing the process, the CEO should play a proactive role in defining goals, deciding what information to collect and how, and determining how results will impact compensation. That collaborative approach will lead to better decisions about what to assess and how, and it will help avoid turning the process into an administrative exercise that adds little value.
Establish a balanced set of evaluation criteria and financial incentives that focus the CEO on driving short- and long-term growth of the business.
To ensure appropriate balance, some companies create two sets of criteria. First is a “CEO Scorecard,” which shows the corporate performance goals and metrics for which the CEO is ultimately accountable. Typically it is organized into a few broad categories such as financial, operational, customer, and human capital. The second set of criteria is a “Leadership Assessment,” which evaluates the CEO against a set of leadership dimensions and capabilities required for sustaining long-term success of the company. While the CEO’s compensation should be designed to appropriately reward performance against annual financial and operational goals, the compensation model should also reward CEOs for achieving goals that go beyond short-term financial metrics and contribute to sustainable value creation.
Gather quantitative and qualitative data from multiple sources.
In order to accurately evaluate the CEO’s performance, the board should gather data on results against the business metrics defined in the CEO scorecard, and it should get input from reliable sources who have direct observations of the CEO’s performance and leadership. Ideally, those sources should include all board members, the CEO, and key members of the CEO’s leadership team. In some cases, it may also be helpful to get input from external stakeholders (e.g., partner organizations, customers, etc.). Input can be gathered through confidential surveys and/or interviews and organized into a draft report to be refined by the Compensation Committee or sub-group of the board that is responsible for completing the CEO evaluation.
Align the full board on the CEO’s evaluation.
Before providing feedback to the CEO, the full board should receive the CEO evaluation report, engage in a discussion about the results, and align on a core set of messages to be delivered to the CEO about his/her performance and suggested business and developmental priorities for the following year. Gaining alignment among directors helps avoid sending mixed messages to the CEO about his performance and future direction for the company.
Ensure ongoing, candid discussions with the CEO about his/her performance.
Don’t wait for the annual review process to provide feedback—make it an ongoing part of the dialogue between the board and CEO. For the formal annual process, ensure that the responsible board members make it a candid, constructive dialogue with the CEO. Listen to the CEO’s perspective about his/her performance, share key conclusions from the full board—with no punches pulled, and agree upon business and developmental priorities for the coming year.
For more on CEO evaluation read our Viewpoint on the topic.