As year-end numbers are released and the board wraps up items concerning the prior year, the task of conducting the CEO’s performance review moves higher on directors’ to-do lists. The review often is placed on an already jam-packed agenda, resulting in a process that leaves both directors and the CEO feeling the review was more a formality than an opportunity to provide meaningful feedback.
We have found that directors have greater success in capturing the feedback they really want to convey to the CEO if they define performance from a broader perspective and develop a more open-ended review process that involves dialogue around performance, rather than rating scales.
What Does CEO Performance Encompass?
Defining performance with the question, “Did we make our numbers?” does not ensure ongoing sustainability. CEOs play a very diverse role within a financial institution, ranging from setting the strategic vision of the business to meeting financial targets to navigating new channels to improve the customer experience.
To capture the multiple competencies required of a chief executive, we recommend that performance be assessed on the basis of seven distinct dimensions:
- Strategy and Vision – How well does the CEO convey the bank’s vision and develop a clear guide for current and future courses of action?
- Leadership – How well does the CEO motivate and energize employees to implement the business strategy and achieve the bank’s vision?
- Innovation/Technology – Does the CEO have a vision for the development of new/better products and services? Is there an IT strategy in place to improve the customer experience and assist in operational and risk management?
- Operating Metrics – Is the bank meeting its current financial objectives? Has progress been made in achieving mid- and long-term financial performance objectives?
- Risk Management – Is the bank adequately managing its risk and receiving satisfactory regulatory reviews?
- People Management – To what extent does the CEO take steps to improve and expand the capabilities of senior managers? Does the CEO’s management style convey a high level of ethics and respect for employees?
- External Relationships – How well does the CEO interact with shareholders, the board, customers, regulators, media and other stakeholders?
Establishing the Process
The key factors in a successful evaluation process are first, to ensure that the entire board has the opportunity to provide input and second, to have a designated committee that drives the process. Boards can tailor the steps in the process described below to their own bank’s culture and needs:
- The CEO conducts a self-assessment at the end of the fiscal year based on the seven performance dimensions described above, highlighting his/her achievement of the goals and directives established by the board for that year.
- The board committee designated to conduct the review discusses the CEO’s self-evaluation and its members’ own observations regarding performance around the seven dimensions. The focus should be on identifying both good performance and key areas for improvement, rather than on trying to cover every aspect of performance in detail. Directives for the upcoming year may also be established at this time.
- The committee’s discussion is documented, a process that is often handled by a trusted outside party who collects and organizes the group’s thoughts. Doing so in memo form, rather than using a rating scale, has the advantage of providing more detail on certain aspects of CEO performance, as well as allowing for examples of where performance over the past year was exceptional or fell short.
- The rest of the board reviews the committee’s preliminary evaluation and substantive comments are incorporated. The final evaluation is then submitted to the full board and reflected in the minutes.
- Designated directors meet with the CEO. It’s good practice to have two directors, such as the chairmen of the board and compensation committee, conduct the review.
- The CEO reports back to the board on key messages and preliminary ideas regarding directives. This ensures that the key points were heard and that actions are in place to address the objectives established by the board for the year at hand.
By broadening the definition of performance and having an established and more open-ended process, directors can get to the heart of the feedback they want to communicate to their CEO. The process above assists directors in identifying areas in which the CEO may need to focus, either because they are strengths that need further development or because they inhibit his/her ability to be effective in certain aspects of the role.