The Performance Relationship – The Board and the CEO

One of the most misused and disused management tools is the performance appraisal. If we were to ask any director of an organisation or its chief executive whether they believed performance appraisal is important, the answer would be an unequivocal ‘yes’.
This intellectual response however, is not mirrored in actuality. There is huge variation in the quality of appraisals – when they are done at all. There are number of reasons for this, but what emerges from all the research on performance appraisals is that, neither appraiser nor appraisee enjoys undertaking them.
There is no easy solution or silver bullet to completely remove the anxiety, tension or discomfort experienced by all participants in the appraisal process. But it is possible to significantly reduce concerns by utilising framework that is evidence based, objective, respects individuals’ dignity, is agreed by all parties and delivers no surprises.
The most important point to keep in mind is that the purpose of appraising performance is to improve performance in the future. It is necessary to review the past but it cannot be altered. The future can, however, be positively influenced by identifying the barriers or impediments to performing at the required level. And even when the current overall level of achievement is satisfactory, various individual aspects of performance can often be improved.
The foundation for any performance appraisal is an examination of vision, strategy, and culture. Unless these are defined, clearly articulated, and understood, the appraisal of the performance of the CEO is materially weakened and is likely to be reduced to an annual review of what has been achieved, with little or no focus on the future.
Measuring what has been achieved during the period under review is vital. The organisation’s strategic objectives are articulated in the business plan from which the CEO’s individual objectives should logically fall. Objectives, key performance indicators or targets – the language used to articulate them should be common at the organisational and individual levels. With these agreed, the board and the CEO should both have clear understanding of what needs to be achieved.
Much of the data that is used to measure performance produces information that is already out-of-date. The really valuable information that can pre-empt major problems lies in lead indicators that show how objectives are being achieved – or not, as the case may be.
This is where concepts of culture, values, and success-related behaviours come to the fore and should be of as much interest and importance to directors as financial results. For example, if customer satisfaction is dropping and the number of complaints rising in an organisation that uses call centre client servicing: it may be that the technology is stretched beyond its capacity; or that inadequate staff training and support has been provided; or that staff morale has been eroding over time.

Systems or training problems can be remedied relatively quickly – not so for morale. If staff do not understand the vision, strategic direction or raison d’être and how they contribute to its achievement; if they do not feel valued and supported; if they suffer from lack of communication; if they do not see management “walking the talk” and “living the values”, they are experiencing fundamental lack of leadership and this is important for directors to know. The process for fixing this is far more difficult, and takes much longer, then addressing systems and training needs.
The negative impacts on any business from these “soft” indicators are harder to detect for boards, and typically when they do become aware of them, through changes in measured outcomes, they are no longer issues, but problems.
Traditional performance appraisal systems focus on what has been achieved – ‘management by objectives’ approach, measuring performance with ‘hard’ data. But the hard data is the simple stuff. Understanding the ‘soft’ indicators, eg retention, organisational health, customer satisfaction and quality of leadership is overwhelmingly more insightful and powerful.
An appraisal of the chief executive should encompass both the hard and soft elements. That allows directors to review what has been achieved and cannot be changed, as well as providing the opportunity for pre-empting problems where the soft elements are early indicators, enabling directors and the chief executive to take corrective action.
There are certain base requirements for an effective appraisal. The board should have an up-to-date and relevant position description. It should have performance agreement in place for the chief executive which clearly sets out what is to be measured and how it will be appraised.
The board should have agreement with the chief executive on the use of 360-degree feedback, on customer satisfaction evaluation and on staff satisfaction, all of which, together with measures such as growth and profit targets, market share etc, are clearly aligned with the organisation’s strategic aspirations.
Agreeing on framework and approach allows directors and the chief executive to understand what is being measured, how and why. Doing this effectively allows both parties to engage in the performance ‘discussion’ objectively and preserves the dignity of each party and the respect between them. The anxiety and concerns about the appraisal process can be mitigated if not totally removed.
Jean-Francois Manzoni, associate professor of management at INSEAD global business school, has identified three significant behavioural phenomena to be aware of. The first is what he calls binary framing, which relates to the often unconscious approach of trying to gain control of situation and to win, which means the other party must lose.
Second is the false consensus effect: we have tendency to assume that other reasonable people will see situation as we see it. When we are reasonable and competent people, why should others see things differently?
The third is called the fundamental attribution error. This is where we link the issue under discussion directly to the chief executive’s disposition and capabilities and underestimate or ignore the impact of the conditions under which he/she is operating.
To overcome these potential barriers to an effective performance appraisal discussion, the research identifies three simple conditions that significantly enhance the acceptance of feedback:
•The person offering the feedback is reliable and has “good intentions”.
•The feedback development process is seen to be fair; the board has collected all relevant information and has allowed the chief executive to clarify and explain his/her view, considers the chief executive’s opinions and applies consistent standards when delivering criticism.
•Finally, the communication process is fair and the chief executive has the sense that she/he has been listened to with some care, despite disagreements.
In essence, there is little in the professional performance appraisal process that is ground breaking. The rationale for measuring or appraising performance has not changed over time, and is unlikely to. It is about improving performance in the future.
Performance appraisal should follow on directly from strategic intent and business planning. It should measure what has been achieved, and how, and the data needed for this process needs to be agreed.
Adopting this approach can contribute to the board and the chief executive discussing performance in constructive and improvement-focused manner.

• By Chris Gilchrist, partner with human capital consulting firm, Sheffield.

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