Big Red Car here. Going to be another nice day here in the ATX. Why not?
So The Boss was visiting with one of his CEO pals and the subject turned to the issue of performance appraisal. CEO performance appraisal. This particular CEO is working for a well developed company that is clearly successful and seemingly has a Board of Directors that is well constituted and attentive to their duties.
In the last three years, they have never given the CEO a formal performance appraisal. His employment agreement calls for such a performance appraisal to be done each year and for it to be tied to the paying of short term incentive compensation.
He has always received the short term incentive compensation but he has not received the performance appraisal. The Board clearly appreciates his performance as evidenced by the generous bonuses they have provided to him through the short term incentive compensation.
By every other measure, the Board is a well functioning and competent Board and takes its duties very seriously with the type of administration that would be enviable for a small public company. The company is private but it is a very substantial company which will top $100MM in sales next year and routinely drops 10% to the bottom line.
This is a damn good company with an obvious blind spot.
The performance appraisal of a CEO is typically called for in any competently drawn employment agreement. [No surprises there, right, Big Red Car? No, Old Sport.]
Many employment agreements tie the payment of short term incentive compensation to the attainment of certain specific objectives and the performance appraisal is the scorecard upon which this objective attainment is measured.
In spite of this, many Boards — good Boards — routinely fail to provide periodic performance appraisal while even granting short term incentive compensation.
The Big Red Car would even dare to suggest that this is closer to the norm than the exception.
Why? Why, Big Red Car? Why?
Why does something like this happen? A well disciplined and professional Board fails to conduct a rigorous performance appraisal of its CEO?
There are many reasons why this might happen.
1. Many times the Board of a small company is composed of folks who are friends of the CEO. This is not unlikely. Who is going to be solicited and appointed to any Board? Strangers? Of course not.
This does create the typical problem of critiquing a friend. It may be socially awkward.
You will just have to deal with it.
2. Many times Boards of small companies are composed of investors. These investors are money managers, not really professional Boardmembers.
They have busy lives and do not devote any real time to their Board duties unless something goes horribly wrong and then their likely involvement is to replace the CEO — this being a harsh method of CEO performance assessment, perhaps.
Deliver great returns for your investors and they will not bother you — about anything. They have other problems to wrestle with.
Understandable. Fair enough. Does not solve the problem.
3. The Board does not have an objective criteria to conduct such a performance appraisal. This is simply a matter of the Compensation Committee getting its act together and developing such a methodology.
Worse still is the “eighth of an inch deep and a yard wide” one page memo accompanying the short term incentive check which poses as a performance appraisal. It is really just a transmittal document at the end of the day.
4. So much effort goes into drafting and negotiating and renewing the employment agreement but no effort goes into making its provisions work correctly.
Face it, if you pay the CEO a nice short term incentive compensation bonus, is he going to protest that he did not receive a performance appraisal? Not bloody likely.
One buys a bit of silence with a big check even with otherwise engaged and committed CEOs.
5. Company performance obscures and overwhelms the necessity to look at the CEO in a critical light or to really assess performance.
When the company is doing well the CEO is credited with the company performance regardless of whether the company or the CEO are performing at the highest potential of the company, the market, the economy or themselves.
It’s the Tiger Woods dilemma — sure you won but you only won by a single stroke. You had the potential to win by 12 strokes. So for you, Tiger, this performance did not live up to your potential. Let’s mark that in the ledger, please.
So WTF, Big Red Car, what is the solution?
The first big thing is to embrace that the notion of assessing the performance of your CEO is essential to improving performance. What we measure, we manage; and, what we manage we improve. It is virtually impossible to improve CEO performance without a system of clear objectives and measurement of the attainment of those objectives.
Boards, listen up. This is your most important job. No — not “an” important job but your MOST important job. To coax a world class performance out of your CEO.
1. Develop a clear methodology of setting objectives and appraising performance. Stick to it each and every year.
Please do not cry on a Big Red Car’s shoulder if you do not have written objectives for the company and your CEO. Go sit in a closet for an hour and ponder this.
Here is an exemplar The Boss used to conduct performance appraisals for his senior folks. Adapt it to your use.
Annual Performance Appraisal form fill form EXEMPLAR <<< if you want this in a Word format, let me know
2. Engage in a direct, candid and useful dialog with the CEO no less frequently than twice a year.
3. Draw the CEO out as to how he appraises his own performance. Many CEOs will do the work for you, if you are clever enough to let them do it.
Here is an exemplar that The Boss used to solicit input from his senior folks prior to giving them their annual performance appraisals. It is useful even for a Board to engage in a dialog with the CEO. You can adapt it for that purpose yourself. Take a look at it here.
Performance Appraisal input document exemplar <<< if you want this in a Word format, let me know
4. Budget the time to do it right. This is the work of the Compensation Committee on behalf of the entire Board.
Put the right folks on the Compensation Committee. [Pro tip: Don’t put folks who know next to nothing about CEO-ing on the Comp Committee and expect them to be able to do you a bang up job. Put someone who has been a CEO on the Comp Committee.]
What are the benefits? Why should anyone break a sweat about this?
For Boards, it is very simple. You agreed to do this in the Employment Agreement. Your job is to coax a world class performance from your CEO. Just do it. [Hey, Big Red Car, that is a very catchy turn of a phrase. Well played. Or maybe it’s just a bit of plagiarism? Watch yourself, Big Red Car.]
For the CEO, it is equally simple. The Board, one day, is going to fire you or you are going to leave. [Haha, tough love for the CEOs today, eh, Big Red Car? Indeed, these CEOs can take it. They’re tough hombres or they better become tough hombres, sayeth the Big Red Car.]
1. You need to know how your performance is evaluated and appraised as this will be the light you will follow to your next such assignment.
2. You should not work with a company that does not appreciate your performance.
3. Your should not work for a company that you cannot lead to the Promised Land. One that is not drawn to your Vision of the future.
4. You know in your heart that you need the guidance and challenge of a competent Board to coax that great performance out of you. You are a thoroughbred, CEO, but you NEED that process and challenge to drive your own performance. Admit it. You NEED that Board to challenge you because you thrive on challenge, CEO. You thrive on challenge.
But, hey, what the Hell do I really know anyway? I’m just a Big Red Car. Be kind to yourselves and somebody else who needs a bit of kindness today. I already know what a great person you are. Let someone else in on the secret.