Like any employee, your CEO needs a regular formal evaluation of their performance in the role. It holds the CEO accountable to their role, but also ensures that the board is actively meeting its duties to their organisation. The benefits of doing a proper CEO evaluation are invaluable.
Evaluations provide a CEO with an overview of their efforts. It helps them to understand their strengths and weaknesses and gives them direction for areas where they can continue to develop professionally. It also shows their contribution to the organisation’s progress towards its strategic goals.
With all the information gathered during a performance review, the board is able to make decisions around the CEO’s salary and their future in the organisation.
Regular performance reviews not only help a CEO to improve, but it also provides a secondary function of protecting the board. There are instances where a CEO can claim wrongful termination, but if the board has been performing and recording their reviews, then they have the evidence to refute this claim.
CEO performance evaluations help develop the executive’s relationship with the board. This relationship is perhaps the most important relationship in an organisation and the performance evaluation should help to strengthen the relationship.
CEOs should be evaluated formally at least once a year. Before any performance evaluation of a CEO can begin, the board needs to determine the assessment structures and objectives that the evaluation will be based on.
It is important that the CEO understands what their performance is being measured on, so that they can ensure their actions align with these goals. One of the main obligations of the board is to provide a clear duty statement of the executive’s responsibilities.
This includes reviewing the executive job description alongside the objectives of an organisation’s plan and policies. Some common categories for evaluating CEO performance include the organisation’s financial performance, the CEO’s execution of the organisation’s strategy, leadership skills and staff development.
Similarly, there need to be clear goals in terms of what the objectives of the evaluation itself are. Some of those could include evaluating CEO salary, checking whether the CEO’s objectives match with the organisation’s objectives and assessing how well the CEO is able to help the organisation work towards future goals and plans. Any evaluation at this level needs to be tailored to the organisation.
Who should perform an evaluation
Usually CEO evaluations are performed by the board committee and led by the chair. Ideally, it includes all directors’ voices at some point during the evaluation. Depending on the nature of the relationship, this may lead to a more frank and open discussion. But it could also invite to potential bias.
While the board should be the one to initiate the evaluation, it doesn’t always have to be the one to carry it out. Sometimes, another committee such as a human resources committee or an executive committee may do the evaluation instead.
Other times, an external consultant may be called in. This may occur if there’s some disagreement among board members about the CEO’s performance, or if the CEO feels hesitant about being evaluated by the board. Bringing in a neutral third party can offer an impartial perspective, but this can mean they lack the full understanding of the organisation from the inside. This could have an impact on the evaluation’s outcome.
How to carry out an evaluation
There is no single best method to perform a CEO performance evaluation. In fact, it’s common to use a mix of methods, including:
- group board meetings
- one-on-one meetings
- online survey tools
All tools should assess the CEO’s performance, the CEO’s strengths and weaknesses, and organisational performance. It should also include canvassing the views of the organisation’s staff to get a fuller picture of the CEO’s performance. There should also be a deadline on the feedback period, with reminders close to the end date to make sure everyone has their say.
Whatever methods are used, the whole board needs to be aware of the evaluation process, and all directors must understand the importance of the evaluation and their role in it.
Once the evaluation is completed, the findings should be written up in a report and delivered to the board. The board can then decide the best way to present these results to the CEO, create action plans for the future and figure out what support the board can offer to the CEO. This should be done jointly by the board together and the CEO, so they can decide a way forward together.
Evaluating for salary
Performance evaluations and salary tend to be tied together, but it is best to keep them separate. CEOs should be paid as much as the organisation can afford, given how important and complicated their responsibilities are, particularly in the not-for-profit sector.
What to do outside of evaluations
The relationship between the board and the CEO is a constant work-in-progress. It requires commitment and understanding from both sides. But at the end of the day, the CEO reports to the board, so to help the CEO do their job well throughout their time with the organisation, here are some tips to facilitate a smooth working relationship:
Keep reporting demands to a minimum
The board needs to make sure the CEO doesn’t feel like they’re applying for their job every month
Provide support and advice
Especially if CEO has requested it. The board’s default position is to always support the CEO, unless there are strong reasons not to.
Ask the CEO how the board can help
Taking a proactive approach to assistance demonstrates commitment to helping the CEO perform at their best.
Give feedback regularly
Engaging in regular, informal feedback can help make the formal evaluations less intimidating. Not only that, but it can help the CEO stay on track to achieving the organisation’s strategic objectives.
Evaluating an organisation’s top employee can be a daunting task, but it is a necessary one to ensure that the CEO is helping the organisation’s progress. Performance evaluations benefit not only the CEO, but the board as well, and it’s up to the board to make sure that they carry them out regularly, both formally and informally.
This article is based on the webinar ‘Assessing the CEO: the good, the bad and the ugly’ by Sallie Saunders. Watch this webinar and others as part of a Boardwise membership.