12 key thoughts and metrics on CEO performance evaluation

Most organizations include a mix of qualitative and quantitative metrics when evaluating CEO performance, according to the "Hay Group/Agenda 2015 CEO Performance Evaluation Survey."

Hay Group collected data between Aug. 25, 2015, and Sept. 23, 2015. There were 147 board and C-suite executives that responded to the survey.

The survey included organizations from across the spectrum of industries, 12 percent of which were healthcare or pharmaceutical companies. The survey also included manufacturing, financial services, education and information technology executives.

Here are 12 key thoughts and metrics for evaluating a CEO's performance.

1. The person who leads a CEO's performance evaluation varies, although it was most often the head of the compensation committee among the organizations surveyed. Here is the breakdown on who lead the evaluation:

• Head of the compensation committee: 39 percent
• Chairman, if different from the CEO: 27 percent
• Lead independent director: 13 percent
• Head of nominating and governance committee: 10 percent
• Entire board of directors as a group: 10 percent

2. Nearly half — 49 percent — of the organizations reported discussing performance with the CEO once per year; 20 percent conducted two performance discussions per year. The majority — 58 percent — report a formulaic link between the performance evaluation and CEO compensation.

3. While most organizations reported establishing multi-year goals for the CEO, the CEO only had input on those objectives at the beginning of the year in 44 percent of the organizations. The board of directors provided input for 76 percent of the organizations and the chairman had input for 36 percent of the organizations. Only 7 percent of the organizations brought in an outside advisor.

4. The organizations used several methods to solicit feedback on the CEO's performance, including the following (respondents could choose more than one method):

• Executive session: 76 percent
• Written or online survey tool: 46 percent
• Informal discussions: 44 percent
• Scheduled one-on-one meetings with board members and others: 28 percent

5. The CEO's direct reports often don't participate in the annual reviews; only 30 percent of the organizations reported executives one level below the CEO provided feedback on the CEO's performance. Almost all — 94 percent of the organizations — report board managers provide feedback, and 68 percent have CEOs conduct a self-evaluation.

However, of those organizations where the CEO is self-evaluating, the information doesn't strongly impact the overall performance review and is instead used as supporting information.

6. The top five most common primary categories for evaluating CEO performance are:

• Financial performance: 98 percent
• Strategy development/execution: 92 percent
• Operating performance: 88 percent
• Leadership skills: 77 percent
• Succession planning/internal talent development: 65 percent

Around half of the organizations also evaluate board relationship and engagement as well as shareholder/external stakeholder engagement.

7. Revenue and sales is a primary financial metric affecting the CEO's performance evaluation at 58 percent of organizations. Less than one-third of the respondents said return on equity was a primary financial metric used to evaluate the CEO's performance. Here is the breakdown:

• Revenue/sales: 58 percent
• Operating income: 49 percent
• Earnings per share: 48 percent
• Total shareholder return: 48 percent
• EBITDA: 44 percent
• Cash flow: 39 percent
• Net income: 38 percent
• Return on equity: 32 percent

8. Strategic growth was reported as a primary metric for evaluating the CEO's performance in 86 percent of organizations. The organizational direction was a primary metric in 59 percent of the organizations and product/service innovation was a primary metric for 37 percent of the organizations. Technology as a driver for growth was only part of the CEO's performance evaluation in 20 percent of the organizations.

9. The primary human capital metrics at more than half of the organizations were:

• Effectiveness of top team: 69 percent
• Succession planning: 61 percent
• Quality of leadership pipeline: 52 percent

Diversity was only part of the CEO's performance evaluation in 18 percent of the organizations.

10. When evaluating the governance metrics, 88 percent of the organizations evaluated their CEOs on effective relationships with the board, including transparency, candor, access to management and ongoing communications with the board. More than half — 59 percent — valued compliance with the legal/regulatory standards as a primary governance metric. The CEO dashboard/scorecard was a primary metric in 24 percent of the organizations.

11. Culture was the most common primary sustainability metric organizations used, with 46 percent reporting culture as a way to evaluate the CEO. There were 44 percent who reported using employee engagement as a metric to evaluate performance and 40 percent said the same of customer/client satisfaction.

12. The five primary operational metrics for the CEO's performance evaluation were:

• Efficiency/savings: 61 percent
• Quality: 39 percent
• Process management: 32 percent
• Employee productivity: 27 percent
• Time to market: 8 percent

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