Effective chief executive performance management by a board is critical.
The sample CEO Performance Assessment policy in the sample online policies makes it clear that the chief executive’s performance is assessed only against those matters that the board has charged him or her with carrying out. In essence this can be boiled down to two short statements:
Underpinning this are several general principles that cover the fairness and integrity of the process.
The performance review process should provide an opportunity for the board and chief executive to identify and agree on future initiatives that will help the chief executive to succeed.
There is no substitute for effective advanced planning in relation to the board’s responsibilities. The following principles and questions should assist:
The board should clearly express the desired and unambiguous results for the year and nominate priorities and (if necessary) weightings. Measurements should be tied to the desired outcome, not to the input or activity.
Results, like profitability or return on capital, can be clearer and more coherent and easily measured in a commercial environment. Behaviour (or processes) like stakeholder management may, in non-commercial environments, be just as important.
The board should draw up an annual statement of performance expectations that states succinctly the key results the board wants the chief executive to focus on achieving during the year. This should be derived from the existing plans and include strategic outcomes and Key Results from the Delegation policies.
The board should avoid rushed, and late, annual reviews. These are heavily influenced by recent events. Continuous informal feedback is best. It should be affirmative and identify any concerns.
The chief executive’s regular reporting to the board is also part of the performance review process. When the chief executive reports to the board on organisational achievement, the whole board can be involved in a timely review process. Such reports should be in accordance with a board-approved monitoring schedule.
Additionally, ‘stocktakes’ might take place every three to four months. These provide a chance to reset expectations before it is too late.
It is commonplace for there to be a final, formal, end-of-year ‘wrap-up’ review.
The board should not leave the chief executive’s performance review solely to the chair, because the chief executive is accountable to the whole board. The board should adopt a process whereby all members contribute to reviewing the chief executive’s performance.
The charter in the online resources offers sample terms of reference for a CEO Performance Management Committee.
This provides a means for a board committee to assist the board to carry out the chief executive’s performance assessment.
The chief executive can help trigger the board’s thinking by preparing a self-assessment.
Staff and stakeholders will provide useful feedback for the board and chief executive. Some chief executives worry that staff feedback is risky because they may not be popular. However, anecdotal evidence, as opposed to formal feedback, is arguably more damaging. The use of 360 degree surveys should be considered.
Performance expectations should remain as current as possible. Formal statements of performance expectations should be changed as and when necessary.
Depending on the nature of the chief executive’s employment contract there may be two key elements in a remuneration review: market relativity and recognition of performance.
The ‘relativity’ consideration is whether or not – over time – the chief executive’s remuneration is kept similar to those in comparable positions. To the extent that the remuneration is inconsistent with acceptable benchmarks the board will have either a dissatisfied chief executive (below the market rate) or dissatisfied stakeholders (above market).
While superficially attractive to both parties, many approaches to rewarding performance are fundamentally flawed and encourage inappropriate behaviour. Any performance-related remuneration component should be measurable.
Remuneration reviews should focus on ensuring the board has relevant information available to it, allowing it to make sound judgements about market rates and its position relative to those rates. There are various proprietary salary surveys available for this.
Sport New Zealand conducts an annual survey of sector salaries that is available to the organisations that contribute to the data. This includes benchmark data for chief executive salaries.