If there’s one common thread running through all successful CEO performance assessments, it’s a genuine commitment to a transparent and two-way process, where the board and CEO agree on the key goals and measurements and the board then works with and supports the CEO in achieving the objectives.
Thankfully, such practice is now commonplace in our commercial sector: sadly, it’s still pretty much the exception in our Not-For-Profit and Government organisations.
Of course, in the commercial world CEO performance assessment is intrinsically linked to the CEO’s remuneration package. Indeed, it defines the package, determining not only the base salary and short-term incentives such as annual bonuses when targets are met, but dictating how a CEO will be rewarded – usually with share options – when achieving longer term objectives that drive company and shareholder value.
And given that there’s so much riding on getting these three components right, it’s not surprising that boards of commercial companies have long understood the need to treat CEO assessment seriously.
Alas, in the Government domain in particular, the CEO is often appointed by the responsible government minister. He or she hires and fires the CEO and sets the salary and largely relegates the board to a mere appendage that seldom gets involved in assessing the CEO’s performance.
Even when the board, say in a Not-For-Profit organisation, does the hiring and firing, sets the remuneration package and assesses performance, it’s rare for the assessment to be as thorough and professional as it is in the commercial sector.
I suspect there are two possible explanations – boards either don’t know how to do it or they’re not the real power base.
In the case of the former, I’ve seen chairs go off to chat with the CEO about his or her performance and agree on the appropriate rewards or penalties…and then tell the board the new deal can’t be divulged as it’s ‘confidential’. That’s rank poor practice as the chair has no authority to do anything without being given that authority by the majority of the board members.
On the power base issue, we normally find this in environments where board member terms are often brief. They come and go with near-obscene haste, the net result being that the real power base tends to reside with the CEO…and the upshot is that the board is so transient that if feels ill-equipped – or even downright embarrassed – to conduct a CEO performance assessment.
So what needs to be done to rectify the situation?
As I said earlier, best practice CEO performance assessment hinges on a genuine commitment to transparency and a two-way process.
The starting point is a long-term strategy containing both financial and non-financial goals. It’s up to the board, then, to approve an annual plan and budget that align with the strategy, to discuss this with the CEO and set down the key goals for the CEO to achieve in the financial year ahead.
Limit it to just the most important ones, maybe five or six – some financial, some to do with, for example, staff/culture and customers/members – then agree on how he or she will be measured, how the board will determine whether the CEO has succeeded or failed. Quantify the measures as much as possible.
With everyone in agreement, the chances are you’ll assess the CEO in an objective and impartial manner, you’ll enjoy a productive professional relationship and you’ll work together for the benefit of the organisation.
Until next time…..