Business // Measuring Executive Performance
ABSTRACT
In the human resource world, it’s always been the employees who have been the center of attraction when it comes to accomplishment at work, job satisfaction, success factor, employee engagement and long-term goals objectives. Since people are the life of every company, then importance and purpose resonate to the company as a whole organization. But the biggest responsibility relies to the overall executive of the company, the Chief Executive Officer. If the HR personnel measure the performance of every employee, the board of directors also perform their duty on performance management as measurement basis to evaluate the CEO. The criteria are much more sensitive and delicate as the measures to be used can be from different factors.
This research will focus on the process of CEO performance management. It will go on an in depth discussion as to how the board of directors will evaluate the CEO since the CEO performance management is rare to academics and scholars for review and discussion. This paper will also extensively explain best practices and process on FORTX (Fortune 1000 company). Evaluating executive performance also gained different insights from different literatures. This is where we gather data from related scholarly journals and informative articles.
In order to comprehend more about this subject matter, James W. Smither and Manuel London’s Performance Management professional series is included in this material. From Edward Mone’s topic on “CEO Performance Management”, he said that in evaluating the CEO, it is important that he/she needs to satisfy comrades, clients, shoulders and employees as the executive will create and establish goals with these constituents. It can come to the basis of behavioural and leadership qualities and competencies that they can measure executive performance goals. Key measurement system is not only for qualitative but also encourages to measure CEO performance on quantitative basis. It is not only about objectives, goals and feedback that the CEO stays in the company but it is appropriate to include non-financial measures “such as employee satisfaction, particularly in leading customer satisfaction and business results, as well as executive competencies that are linked to driving business outcomes, should be used to improve the evaluation process”. p. 235. The CEO evaluation, compensation and corporate governance are a “must” in the transparency of CEO performance management. As we understood the principle and importance of CEO performance management, how do they design and measure it? We mentioned the key measurement system in evaluating the CEO but here we apply its indicative particularly where the author discussed FORTX. According to the article of Talent Daily, entitled “In Measuring CEO Performance, There Are No Easy Answers”, it’s obviously on the article title itself. With so many questions whether and how the reward of a CEO or the pay-for-performance schemes is not possible to design, it threw out a question “how CEO performance should be evaluated to ensure that incentive structures are rewarding the right choices and behaviours on the part of the chief executive. Going back to Edward Mone’s chapter, corporate financial is one like revenues, shares, cash flow, operating margin, products and services, customers’ perception and satisfaction and employee engagement. It is a mixed of financial and non-financial metrics. Feedback is strategic ones that involve leadership styles, mergers and acquisition and also the continuous performance of FORTX. It is called the “Executive Session” without the CEO as it’s applies with the overall evaluation process. The author indicated CEO appraisal as an annual process and the first major ladder in the performance evaluation. CEO will write a self-appraisal in a narrative form. It will have a four-point scale portion that will be reviewed by the corporate governance and compensation committees. The committee will consider the extent of the results achieved. Experts are very cautious in compensation package based on performance in the research articles because of its sensitive orientation from targets and goals. However, these are critical measures for FORTX’s success for long-term. But other organizations are trying a different style for determining CEO compensation other than “hard” financial performance date. Some include employee-focused metrics like workplace health and safety. “Soft” targets were not also successful alone kind of metrics. The board cannot just rely on 50% people and community or 50% total shareholder return only. According to the statistical review of Talent Daily, They now find themselves dissatisfied with the result, recognizing that they can’t simply rely on financial measures in assessing corporate performance and in distributing rewards to CEOs and senior executives. But they don’t really know what to do instead”.
To analyse it, they relied more on financial metrics on performance evaluation of the CEO. Let’s take a look on an extensive statistical research from Hay Group mentioning the below results:
“For those that do offer additional information about the process, the most common category of evaluation is financials (93%), followed by strategic initiatives (72%) and operational objectives (48%). Other less frequently referenced categories include succession (27%), culture (24%) and board relations (8%)”. p.2
Still, most of the companies are dwelling on the financial side of evaluation. A discussion from Wharton University of Pennsylvania on “The Art and Science of Measuring CEO Performance” communicated that board can utilize different metrics such as long-term remuneration; long-term performance company’s stock or any numbers that affect management style of a CEO whether is it a hard or a soft metrics. They added also that earnings growth is the most critical and CEO compensation package is connected to the financial compensation in achieving various types of corporate income. Well, even the simplest employee compensation in an organization is related to his/her job description in performing the task at hand. A stock share is a different measure. Moreover, there is no perfect or best performance measure that is standard to be applicable in all companies whether it is a public or private sector. It means to say that it would likely be compensation versus performance management form of evaluation. At the end of the day, it will only just be a “judgment call” between the CEO and the board of directors. There is no standard measure as all companies apply different strategies.
For recommendation, measures for CEO evaluation should also recognize non-financial metrics as they still weigh and can be assessed reasonably. Of course, financial metrics will not be removed. A strategic alignment can also be discussed for goal setting. Sustainability, people, governance and crisis management are also an important metrics. Growth, leadership, capability building and decision making will follow upon above application of the metrics. CEO performance management will always be a process in order to have a holistic view of CEO leadership to check contributions and long-term effectiveness of the executive to an organization.
References
Smither, J., & London, M. (2009). Performance Management (pp. 233-243). San Francisco: Jossey-Bass. Retrieved from http://file:///C:/Users/admin/Downloads/PERFORMANCE%20MANAGEMENT%20Performance%20management%20%20putting%20research%20into%20action.pdf
Talent Daily. (2017). In Measuring CEO Performance, There Are no Easy Answers. Retrieved from https://www.cebglobal.com/talentdaily/in-measuring-ceo-performance-there-are-no-easy-answers/
Hay Group. (2015). A CEO performance dashboard: obtaining better CEO evaluations (pp. 2-3). Hay Group. Retrieved from http://www.haygroup.com/downloads/us/2015%20No%203%20-%20A%20CEO%20Performance%20Dashboard.pdf
Wharton University of Pennsylvania. (2007). Knowledge @ Wharton. The Art and Science of Measuring CEO Performance. Retrieved 5 February 2018, from http://knowledge.wharton.upenn.edu/article/the-art-and-science-of-measuring-ceo-performance
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