I remember watching presentation by CEO at which the front row was filled by his direct reports. They were both interested and passionate about what he had to say. It was, for me, such rare sight that I half expected David Attenborough, safari shorts and all, to emerge from the curtains and proclaim: “You are witnessing an event rarely caught on camera…”
For the many other CEOs who perform well, with or without any captivating ‘x’ factor, measuring performance is more difficult. How does board give effective feedback to the CEO so he or she can continue to develop?
This problem of CEO performance measurement has been around for some time. The Wall Street Journal in April 1998 reported: “Performance reviews may be routine at lower levels of corporations, but they are still rarity at the top. Most CEOs are far more willing to submit to an annual physical examination than rigorous performance appraisal. And when boards do conduct reviews, they often focus on executive pay rather than issues like leadership and effectiveness.”
Boards that want to adopt best practice should adopt the 360 degree feedback approach. The process involves obtaining feedback from variety of sources (see diagram next page) and evaluating it.
Balanced performance feedback
Balanced performance feedback is six-step process that’s outlined below. The 360 degree feedback covers three of the six aspects and focuses on the more subjective elements. Our studies show that 360 degree feedback gets good to excellent rating wherever it has been used. It is an ideal tool for providing personal development feedback to the CEO.
A better practice performance development and appraisal process for CEOs includes:
* Review achievements against objective goals – Board reviews the report from the CEO against mutually established goals and objectives eg, financial indicators, product quality, customer satisfaction.
* Review achievements against subjective goals – An independent party prepares 360° report from feedback from the board, key external stakeholders, GMs etc.
* Mentorship – CEOs need mentors. The mentor helps the CEO work with the 360° report to lift performance.
* Identify education or resource requirements – Provided by the 360° report. Mentor ensures progress is made in this area.
* Bonus payment and remuneration level established for next period – Performance bonus is based on performance assessment. New remuneration set after advice from remuneration experts for the forthcoming period.
* Establish goals and objectives for next review period – CEO prepares the first draft for discussion with the board. (A US study suggests better practice companies keep lists to 5-10 objectives.)
Performance benefits
* The board gets more rounded performance picture. The board has limited opportunity to see CEO in action, usually observing only at board or committee meetings. Some directors may not realise the scope of the CEO’s job or may be tempted to judge performance on the basis of popularity instead of performance.
* Improves communication between board and CEO. The lack of balanced performance feedback can result in lack of communication.
Gilbert Amelio, who was fired as Apple Computer’s CEO, said in Wall Street Journal article that his dismissal “… came as total surprise. Not single board member felt comfortable enough to tell me I was in trouble.
“CEOs really want the feedback about how we’re doing and what we can be done to improve what’s going on.”
* Minimises opportunity for conflict. Personality clashes between individual board members and the CEO can also cause problems. Working together on comprehensive performance review process with the CEO and backing it up with clear policy helps avoid conflict.
* Provides the company with better legal protection. With the growing emphasis on employee rights legislation and boards increasingly vulnerable to legal action, filed formal appraisal protects both the board and the CEO in the event of dispute. The formal appraisal provides consistent work record over time and helps minimise contentious situations.
Subjective areas to cover
Each 360 degree feedback process is tailored to fit the organisation. Questions should be designed to assess the performance in the subjective areas reviewed. Examples of subjective areas include:
• Leadership (internal)
• Leadership of external parties (eg active participation in trade association, etc.)
• Vision
• Performance measurement within the organisation
• Team building and the ability to inspire
• Human resources management
• Customer satisfaction
• Innovation
• Policy development
• Strategic management – giving adequate attention to planning and mapping out the future of the organisation
• Financial management
• Professional development of CEO
• Effectiveness of the CEO to delegate
• Communication within the company
• Board relations (including communication to the board – formal and informal)
• Union relations.
Lessons learned
Lesson 1: Make it clear who owns the 360 degree report
This is question of ownership. Who owns the 360 degree report, the CEO or the board? If the results are for the CEO only, then the selection of respondents is likely to be more balanced. However, if the results are to be used for appraisal or salary reviews, then the selection of respondents may be biased towards receiving positive feedback. Worst of all, if the board select the respondents it is likely to create conflict between the CEO and the board.
Lesson 2: Divorce the 360 degree feedback from the remuneration review
The 360 degree report is best left as performance development tool and hence the report should be owned by the CEO. This does not preclude using the report in the salary review, as the CEO can table the report if they wish.
Lesson 3: Annual performance feedback is insufficient
It is common practice for managers and staff to get two to three formal performance feedback reports year. This helps provide timely information and help assess if the person is making progress in the right direction. We suggest that the CEO should have 360 degree feedback process performed twice year. Thus it is important that the process be efficient, cost effective and focused around Pareto’s 80:20 principle.
David Parmenter is the CEO of Wellington-based waymark solutions.
Email: [email protected]
