HR WK6 assgmt

CHAPTER 7 CEO PERFORMANCE MANAGEMENT *

Edward M. Mone

Introduction

Overview

This chapter will focus on the process of CEO performance management, which includes goal setting, feedback, and appraisal, as well as tying the outcome of the performance management process to CEO compensation. Much has happened in the general business landscape that has affected CEO performance management and compensation since the Graddick and Lane (1998) chapter appeared. These events will be discussed below, but at the heart of it all, corporate greed and scandal have led to numerous legislative reforms targeted at significant improvement in corporate governance. As a result, today’s boards of directors are being held to new standards of performance, particularly in one of their primary roles: CEO performance management. In fact, the focus on board effectiveness in the practice of organization consulting is fairly recent and driven largely by these same events, as noted by Nadler, Behan, & Nadler (2006), and as evidenced by a complement of recent books (Brown, 2006; Carver, 2006; Charan, 2005; Nadler, Behan, & Nadler, 2006) aimed at improving board functioning and effectiveness.

Since the process of CEO performance evaluation or management is still somewhat private and inaccessible to most academics and practitioners, this chapter includes a detailed focus on this process at FORTX, a pseudonym for a Fortune 1000 company. As the FORTX CEO performance management process is discussed, it will be examined and compared to what may be considered best practices that are driven by research, legislation, and regulation.

Overall, this chapter includes a brief review of Graddick and Lane (1998); a look at the key events and reforms that have shaped CEO performance management, compensation, and corporate governance since the late 1990s; a detailed discussion of FORTX’s CEO performance management process and its tie to CEO compensation; a review of literature particularly relevant to CEO performance management, compensation, and board effectiveness; and a closing summary and final words, with recommendations for further action and research.

Where We Have Been

In their chapter on evaluating executive performance, not just CEO performance, some of what Graddick and Lane (1998) highlighted included the need to satisfy constituencies—customers, shareholders, and employees—and to establish goals for these constituencies, and to do so before determining measures of executive performance. They also stated that this linkage to executive performance planning is not as strong as desired. In addition, they discussed the importance of executive competencies and how behavioral and leadership competency objectives were becoming more frequently used as supplements to key measurement systems when establishing executive performance goals. The weighting of these goals and competencies, however, as measures of performance varied and were not always clearly defined. There was also significant variation in how goals and measures influenced compensation decisions.

Graddick and Lane (1998) concluded with the following messages:

· Evaluating executive performance is somewhat mysterious, given the lack of published literature, with approaches being best described as informal and inconsistent;

· Executives want and need clear goals and objectives, ongoing candid feedback, and a system that tightly links pay and performance;

· Appropriate non-financial measures, such as employee satisfaction, particularly in leading to 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;

· The stability of the executive appraisal process is influenced by practices and processes brought from one company to another by the CEO (for example, 360-degree feedback), the dynamic nature of the marketplace, and frequent organization changes;

· Executives need to remain in an assignment long enough to evaluate their impact;

· HR needs to sell the value of performance management to executives, as well as highlight the cost of neglecting effective performance evaluations, as executives often do not have a formal process, and that HR should keep the process simple to minimize paperwork and time; and

· “There is still important work to be done to strengthen our approaches for evaluating executive performance.” ( p. 400 )

Their advice is still relevant, and there is still some mystery to the process. However, the overall landscape has significantly changed since the late 1990s, and those changes have had enormous influence on CEO evaluation, compensation, and corporate governance, increasing the transparency of the CEO performance management process to a greater extent. A serious process for assessing CEO performance is no longer an option; it clearly is a “must have” (Oliver Wyman, 2003). Today formal CEO appraisals are a requirement for publicly traded U.S. companies, although the mandate focuses exclusively on evaluating past performance to determine compensation (Nadler, Behan, & Nadler, 2006). However, boards seem to be improving at the task of CEO evaluation, according to a recent survey (Mercer Delta Consulting, 2005) of directors of Fortune 1000 companies: 80 percent of respondents rated their CEO evaluation process as effective or very effective.

Key Events and Reforms

Bainbridge (2007) and Schminke, Arnaud, and Kuenzi (2007) offer a history of events since the 1990s that have shaped the business landscape, executive compensation, and CEO evaluation, and these include:

· The 1994 change to tax laws, attempting to control excesses in compensation, limited the expense deduction for executive compensation to $1 million, but exempted incentive-based compensation (such as stock options) from this cap.

· The stock market bubble of the late 1990s further emphasized the focus on stock options, as rising stock prices made options look quite attractive, but this was followed by the less jubilant years of 2000 to 2002.

· The lack of strong governance by corporate management and boards of directors that led, by and large in this environment, to accounting scandals—caused by the desire to meet financial targets (“make the numbers “) and to bring value to stock options—at Enron, WorldCom, Tyco, and Global Crossings, which surfaced during the period of October 2001 to early 2002.

· The passage of the Public Company Accounting Reform and Investor Protection Act of 2002, known as the Sarbanes-Oxley Act (SOX), aimed at improving internal controls, requiring the certification of financial statements by the CEO and CFO, ensuring independent auditors and board audit committees composed of only independent directors, establishing rules to increase the transparency of financial reporting as well as providing protection for whistle blowers and more severe penalties for corporate misconduct.

· The implementation of more stringent listing requirements by the NYSE and NASDAQ, including shareholder approval of all equity-based compensation plans.

Furthermore, legislation was recently passed that now requires disclosure of all aspects of CEO compensation, including severance agreements, pensions, bonuses, perks, and the calculations for short-and long-term compensation.

Clearly, the major goal or thrust of the above legislative and regulatory changes is to improve corporate governance, and these changes can be considered a broad and continuing response to a number of accounting scandals that had as their primary cause the incentive to be dishonest to add value to stock options. Problems in corporate governance can now significantly affect CEOs, as Title III of SOX provides for severe penalties if a corporation is obliged to restate its financials due to misconduct, including a return by the CEO and CFO of any bonus, incentive, or equity-based compensation, as well as any profits received from the sale of stock, during the twelve-month period following the original issuance of the financials.

FORTX’s CEO Performance Management Process

FORTX Context

Before presenting FORTX’s current CEO performance management process, it is important to note that, like many other companies over the past several years, FORTX has had its share of challenges and publicity, involving shareholder concerns, board member changes, and turnover in senior leadership. FORTX’s current CEO faces the challenges of building a more ethical workforce and changing the company’s culture to one of empowerment, with greater accountability and reward for performance.

Factors Shaping FORTX’s CEO Performance Management Process

FORTX’s process has been shaped by a number of factors, including: FORTX’s history; Sarbanes-Oxley, and other legislation and rules (such as IRS regulation 162m, which provides guidance for the tax treatment of long-term compensation and the type of performance measures that can be used in the calculation of compensation); and best practices, brought forward by board members with expertise in corporate governance, a leading consulting firm with expertise in executive compensation and appraisal that serves as an advisor to FORTX, and FORTX’s chief human resources officer.

Given the above factors, a major goal was to establish the FORTX CEO performance management process, which includes the awarding of compensation, as a transparent process free from any ostensible manipulation relative to evaluating and reporting organizational performance, as well as to awarding executive and CEO compensation.

By the close of FORTX’s most recent fiscal year, the CEO would have had several years of experience in the role, including, of course, working through the CEO evaluation process with

FORTX’s board. Goal Setting

The goal-setting phase of the performance management process is initiated by the CEO with FORTX’s overall business plan serving as the context. Since the beginning of the CEO’s tenure, the CEO has written a narrative, documenting the progress to be made against each of FORTX’s main goals or objectives. Today these objectives still remain the focus, but there is a greater emphasis on identifying specific financial targets and other quantitative measures. This emphasis is now possible because the CEO and the senior leadership team (the team of FORTX’s most senior functional leaders), over the past few years, developed a clearer understanding of how FORTX operates and of the most critical and important measures of success and indicators of business growth.

As a result, at the beginning of FORTX’s most recent fiscal year (the year that will be highlighted here to illustrate the process at FORTX), the CEO introduced the FORTX “Company Scorecard.” Not unlike other scorecard methodologies (for example, Kaplan & Norton, 1996), measures and metrics were created in four major areas, including: corporate and financial; products and services; customers; and employees. Samples of these measures are presented in Exhibit 7.1 .

Exhibit 7.1 FORTX’s Organization Scorecard Categories and Sample Measures.

· Corporate financial: revenue, earnings per share, cash flow from operations, and operating margin; and costs as a percent of revenue, including selling and general and administrative costs

· Products and services: product penetration and contract renewals

· Customers: customer perception and customer satisfaction

· Employees: employee engagement and employee satisfaction

Although these measures and metrics will be detailed in the CEO’s narrative, those upon which the CEO is evaluated and compensated include operating income, cash flow from operations, revenue growth, earnings per share, and customer satisfaction. The rationale for the selection of these measures will be discussed later. The narrative, as well, may include the personal actions the CEO intends to take; however, the CEO does include a behavioral self-assessment as part of the year-end evaluation (see CEO Appraisal, below).

Once the narrative is complete, the CEO will initially verify targets (such as a cash flow from operations target in the billions of dollars, within a range, for example, of plus or minus $45 million) with the CFO and then work together with the board compensation committee to finalize them, with the next step in the process being a full board review and, ultimately, approval. This would conclude the goal-setting phase.

Feedback

Contrary to what might be expected, the regularly scheduled meetings of the board of directors are not the usual forum for providing performance feedback to the CEO at FORTX. Typically, board meetings focus on general updates and changes to strategy, leadership, mergers and acquisition activity, and the ongoing performance of FORTX. However, at the conclusion of each board meeting, the board meets without the CEO; this type of meeting is referred to as an executive session. During each executive session, CEO performance is discussed. Following these sessions, and on a rotating basis, a director will provide specific feedback to the CEO, on a one-to-one basis.

Providing performance feedback is also accomplished more informally, and may, for example, come from an individual board member regarding company strategy, or from a board committee, such as the audit committee, on operational issues. The primary vehicle for this more informal and regular feedback, however, can be characterized as the constant communication flow, with a regular focus on CEO performance, between the board chairman and the CEO. This feedback focuses on what the chairman or board has observed or may be driven on an exception basis. For example, to further improve CEO and senior leadership team effectiveness, the chairman recommended engaging an external consultant to administer 360-degree feedback and a variety of personality and leadership style assessments to all of the senior leadership team members, including the CEO, and subsequently to conduct a series of two-day team-building sessions. It would be fair to say that the chairman acts like a supervisor in this respect, providing feedback and counsel to the CEO. In fact, an emphasis on development for a relatively new CEO is an important focus for a board of directors and should be part of the overall evaluation process (Nadler, Behan, & Nadler, 2006).

CEO Appraisal

CEO appraisal at FORTX is an annual process, and the first major step in the evaluation of performance is taken by the CEO. The CEO writes a self-appraisal in narrative form—actually a letter to the board—which is predominantly a discussion of company performance, referencing the extent to which targets for the measures detailed in the goal-setting narrative and outlined in the company scorecard have been met, measures situated within the context of FORTX’s major objectives. As a result, the appraisal of the CEO largely reflects an appraisal of FORTX’s performance. The progress against each one of the major objectives is also rated on a four-point scale (ineffective, somewhat effective, effective, and very effective). This part of the narrative (edited for publication) might read as follows:

Objective 2: Building an ethically-driven culture of empowerment and accountability—Effective. “Given past leadership and FORTX’s history, we are making significant progress in creating an ethically driven culture in which empowerment, strong performance and accountability are rewarded. We have implemented a number of programs, including company-wide ethics and compliance training and leadership training for middle-and senior-level managers…. Although we continue to make progress, we are still, in essence, rebuilding FORTX’s culture…. “

The CEO’s self-appraisal or letter is initially sent to the corporate governance and compensation committees for their joint review, evaluation, and recommendation to the full board. Accompanying this letter is the CEO’s self-assessment using the behavioral component of “The CEO Evaluation,” which is available from Boardroom Metrics (2005) and is shown, in brief, in Exhibit 7.2 . The full board then evaluates the CEO’s performance. Of course, during this executive session, the CEO is absent. At the conclusion of the session, the chairman provides feedback to the CEO.

Compensation

When reviewing the CEO’s self-appraisal, the compensation committee will also consider the extent to which results were achieved and how that determines the level of compensation awarded, metrics for which were set during goal setting. The CEO’s targeted total compensation includes a 20 percent base pay component and an 80 percent variable component, with the latter determined by the extent to which the metrics were achieved. The variable pay component, however, can range from 0 to 200 percent of target, depending on company performance.

The CEO’s variable compensation has both short-term and long-term components. The short-term component, a cash bonus, is awarded on an annual basis, ranging from 0 to 200 percent of target. This component is based on measures that make the most sense in the short run, including operating income, revenue growth, and customer satisfaction. The long-term component, also with a target range of 0 to 200 percent, is a restricted stock award that vests immediately after a three-year period, and it has two components. The first component of long-term compensation, accounting for 60 percent of the overall award, is based on annual targets for operating income and revenue growth. The second component is based on three-year targets for cash flow from operations and earnings per share. This second component accounts for the remaining 40 percent of long-term compensation. Overall, the long-term component is structured to promote both executive retention and a focus on long-term company performance; the final determination of value and, of course, payout, are both made at the end of a three-year period.

exhibit 7.2 The CEO Evaluation.5

· Leadership: The CEO…

· Has clearly defined the basic purpose and mission of the organization

· Communicates effectively with internal and external stakeholders to build support for the mission, vision, goals, and direction of the organization

· Management: The CEO…

· Delegates effectively to members of the senior management team and other staff

· Clearly articulates priorities and ensures management focus and accountability around addressing priorities

· Working with the board: The CEO…

· Has a strong working relationship with the board chair

· Helps educate the board on the organization

· Financial management: The CEO…

· Has a solid, up-to-date understanding of the organization’s income statement, balance sheet, cash flow, and other financial measures relevant to its business and financial situation

· Ensures that the organization’s financial records are accurate and up-to-date

*Note: This is only a partial list of the factors in each category. At FORTX, each is rated on a four-point scale.

Source: Adapted from Boardroom Metrics, 2007.

It is important to re-emphasize that the CEO’s cash bonus and restricted stock award are quantitatively driven—compensation levels are determined in advance, based on measures and targets set during the goal-setting phase. The compensation committee only has negative discretion: the committee cannot authorize any compensation greater than the payouts indicated by the targets achieved, but it does have the power to reduce those payouts based on CEO performance or other factors directly influencing the success of FORTX.

Finally, the primary rationale for the measures chosen that have an effect on compensation is simply that these are the critical measures for FORTX’s success, and they are utilized in compensation in such a way as to reward and drive behavior that focuses on long-term success, with each year building toward success in subsequent years—or over the long run.

The FORTX Process and the State of Practice

Compensation Committee

We begin this section with a discussion of the compensation committee, given its role in setting, approving, and evaluating goals and the attainment of the CEO’s metrics and targets and in recommending the level of compensation to be paid for the extent to which those performance metrics and targets were achieved.

Certainly, FORTX is in compliance with the New York Stock Exchange (NYSE) Listed Company Manual section 303A.05 (2004), which requires all listed companies to have a compensation committee, and that the committee must consist solely of independent directors. In general, the role of a compensation committee (Bainbridge, 2007) is to review and approve, or recommend to the full board, compensation for the CEO, as well as to have oversight for the corporation’s compensation policies and practices. This role is articulated in corporate governance guidelines (readily found, for example, on corporate websites, including those for companies such as Consolidated Edison, McDonald’s Corporation, Kraft Foods Inc., Southwestern Energy Company, State Street Corporation, and The Charles Schwab Corporation). The stated purpose of FORTX’s compensation committee is as follows:

The Committee’s general purpose is to enable the Board to fulfill its responsibilities with respect to executive compensation, including: (a) reviewing and approving all goals and objectives impacting CEO compensation; analyzing and evaluating CEO performance with respect to those goal and objectives; and (b) based on this evaluation, determining and approving the CEO’s compensation, as well as incentive and equity-based compensation for other senior-level executives.

Furthermore, the NYSE also requires the committee to have a written charter declaring its power to set CEO performance goals and evaluate performance, and to establish the CEO compensation plan. The committee should also have the power to hire an external consultant for advice. The Securities and Exchange Commission (SEC), besides requiring extensive disclosure of compensation in the company’s annual proxy statement, instituted a new requirement in July of 2006, called the Compensation and Discussion Analysis (CD&A), necessitating a discussion and analysis of all aspects of the company’s stock option plan (Bainbridge, 2007). FORTX is in compliance with these NYSE and SEC requirements.

Compensation for CEOs

For at least the last ten to fifteen years, CEO pay has been the subject of much press, mostly critical, focusing on whether CEOs are worth the compensation they receive (Epstein & Roy, 2005; O’Reilly & Main, 2007; Silva & Tosi, 2004). Today compensation committees are under more intense public scrutiny as some excessive severance packages have made the headlines of tabloids and business publications alike—Michael Ovitz receiving $140 million and Richard Grasso, $187.5 million (Brountas, 2004; Charan, 2005).

The principal-agent model (Laffront & Mortimer, 2002) underlies the theory and practice of executive compensation (Conyon, 2006; O’Reilly & Main, 2007). This model involves shareholders (the principals) creating the most economical compensation plan possible that will motivate CEO (agent) performance to maximize firm value. Usually the board of directors (and more specifically, the compensation committee) acts on behalf of the shareholders (or principals) to maximize firm value, but excesses in CEO pay and scandals have still found their way into the public’s eye, including those occurring at Walt Disney Company, Adelphia Communications Corporation, and Tyco International (O’Reilly & Main, 2007). Conyon (2006) reports that the main driver of CEO pays gains in recent years (1993-2003) has been grants for stock options; and he also discusses that there is a positive correlation between companies that have been the target of fraud allegations and option incentives. Quite recently, what has come to light is the number of firms that have engaged in options “back dating” (instead of using the closing price on the date the grant is made as the option strike price, going back in time and picking a date when the stock closed at a lower price) and “spring loading” (issuing a grant just before news is announced that is guaranteed to drive up the share price). Finally, a major influence on the CEO’s cash compensation, according to O’Reilly and Main (2007), may be the degree of reciprocity and social influence that exists between the board and the CEO, with higher levels of reciprocity and social influence leading to higher levels of cash compensation.

Long-term compensation, when based on more than just financial metrics and driven by a broader view (that is, a corporate social responsibility view) of satisfying stakeholders (customers, employees, local communities, government, and others), can have a positive effect on corporate financial performance (Deckop, Merriman, & Gupta, 2006). In this study, six dimensions of corporate social responsibility (CSR) were measured, which included “taking positive action in the areas of community relations, human rights, the safety of the firm’s product or service, the environment, diversity in fairness and hiring, and other aspects of employee relations” (p. 333). So, for example, a possible measure in the area of diversity and fair hiring might be to increase the number of diverse hires at the senior management levels, with the metric being a year-over-year increase. In terms of the effect of corporate social performance (CSP) on compensation, what Deckop, Merriman, and Gupta (2006) found is that CSP is positively correlated with a long-term compensation focus, it is seen as a contributor to corporate financial performance, and, although some firms have direct CEO incentives to improve CSP, it appears that a long-term compensation focus in and of itself also promotes CSP. Much of the attention on CSP, the authors note, has been caused by the recent scandals involving senior corporate executives.

More broadly, this approach, to consider more than just stockholders and financial measures in the evaluation and rewarding of CEO performance, is consistent with the view expressed by a number of authors (see Exhibit 7.3 for a summary of key considerations when determining CEO compensation). Charan (2005), for example, argues for the need to move away from the single financial measure, such as stock price increases or EPS (earnings per share) growth. To do so, he suggests the following key tasks for boards to consider as they develop an effective CEO compensation package:

· Define a philosophy of compensation that reflects the board’s intentions for the company.

· Within the framework of that philosophy, define multiple objectives.

· Match the objectives with both cash and equity awards, as appropriate.

· Design a compensation framework that depicts the relationship between total compensation and the objectives to be achieved.

· Conduct a meaningful quantitative and qualitative evaluation of the CEO’s performance.

· Consider severance pay, input from HR, and external consultancy.

Unfortunately, perhaps, Epstein and Roy (2005) report that CEO performance continues to be defined mostly in terms of financial results and that this focus neglects the inputs, processes, and outputs leading to those results. Their review of the proxy statements in August of 2004 of fifty-nine of Fortune magazine’s America’s Most Admired Companies showed that 100 percent of the sample used financial performance indicators, and that of a list drawn from the literature of eleven other categories of non-financial performance indicators (for example, strategic planning—strategy formulation, reengineering, management of acquisitions; succession planning—management succession planning; management style—leadership, teamwork, personal excellence; controls and risk management—regulatory compliance and risk management; management of customer relations and growth—customer satisfaction, market share, sales), measures were used from little more than two categories. Twenty-six companies used just one category, fourteen used two categories, and only three companies used measures from six categories. As might be expected, the category “management of customer relations and growth” was the second-most-used category (measures from this category were chosen by 42 percent of companies).

Exhibit 7.3 Determining CEO Compensation—Considerations.

· Ensure the board develops and articulates an appropriate philosophy of compensation for the CEO, considering strategic objectives, industry best practices, and legal and regulatory requirements.

· The compensation committee, in conjunction with the full board, should determine which objectives will drive short-and long-term compensation, the nature of the compensation, such as cash, restricted stock, or other methods, and how compensation levels will be calculated based on targeted measures and metrics.

· To take advantage of tax regulations, consider that the measures and metrics that drive compensation must be findable, quantifiable, and able to be calculated by a third party.

· Utilize, for example, operating income, revenue growth, and customer satisfaction as the basis for determining short-term compensation.

· As the basis for long-term compensation, consider, for example, cash flow from operations and earnings per share; also consider multiple-year targets for operating income and revenue growth.

· Consistent with the corporate social responsibility perspective, set compensation-driven measures and metrics, where possible.

· Discretion in evaluating performance for awarding year-end compensation should be limited to negative discretion and not allow for any compensation beyond the levels and targets set during goal setting.

The continued focus on financial performance, particularly in turbulent business and economic times, is further supported by a BusinessWeek (Thornton, 2007) cover story, with the following headline: “Perform or perish: For CEOs of private-equity-owned companies, the pressure to deliver is getting unbearably intense.” Private equity firms are expecting their CEOs to deliver quick financial results and improvements and to ensure that the changes they make become the new way of doing business. Finally, a series of CEOs, including Stan O’Neal of Merrill Lynch and Chuck Prince of Citibank (“Cracks in,” 2007), have recently been dismissed as a result of the subprime mortgage fiasco brought to light in late 2007; both O’Neal and Prince were at the helm when their firms lost billions of dollars due to their holding of large positions in CDOs (collaterized-debt obligations, which pool mortgage-backed and other credit instruments). In spite of their performance, both of these CEOs walked away with hefty, multimillion-dollar severance packages.

It appears that financial performance is the major reason for CEO dismissal. For example, a recent study (Kaplan & Minton, 2006) indicates an average CEO tenure of approximately six years and shows that board-driven turnover is significantly related to firm performance relative to industry, industry performance relative to the overall market, and the performance of the overall stock market. Jenter and Kanaan (2006) find, as well, that boards are more likely to dismiss a CEO who underperforms his or her industry peer group during times of low industry and market returns, in other words, when financial performance becomes more prominent and important. Oddly enough, the CEO’s job used to be about stewardship of the corporation’s assets for stakeholders, but today it is all about the bottom line for investors (Lucier, Kocourek, & Habbel, 2006).

For FORTX ‘s CEO, 80 percent of total targeted compensation is variable, as discussed earlier. Because of changes to the tax status of options, FORTX’s past history of excessive CEO compensation, and an improved focus on pay-for-performance, FORTX has ceased using stock options. The CEO’s long-term compensation is now completely in the form of restricted stock awards. Although FORTX does use more than just financial results to track and evaluate its own and its CEO’s overall performance, as discussed earlier, the CEO’s compensation is primarily affected by two stakeholder groups: the firm’s customers and business partners. Although employees are also included as a stakeholder group in the company scorecard, the associated measures and metrics are not directly pay influencing. This approach is largely due to IRS regulation 162m, which requires that the metrics used to determine compensation (to ensure its tax deductibility) are findable, quantifiable, and can be calculated by a third party—which is readily true of the typical financial measures reported and used. Finally, FORTX has no direct or single metric for corporate social performance.

Performance Management, Goal Setting, Feedback, and Appraisal

In general, the study of performance appraisals or evaluations for CEOs is lacking in the literature, due primarily to the reluctance of boards of directors to divulge details about how they make decisions (Silva, 2005; Silva & Tosi, 2004), and the fact that the majority of what is available is speculative and prescriptive.

Rivero (2004; see also Tyler & Biggs, 2001, for a comparable approach to the yearly initiation of the process) recommends answering the following questions as a first step in creating or revising a CEO evaluation or performance management process: what is the purpose of the evaluation (for example, compensation for performance, CEO development); what will be measured (for example, bottom-line financial metrics, operational leadership, personal impact); who will be involved in the evaluation (the compensation committee, full board, customers, employees, etc.); and how and when will the evaluation be implemented (What are the steps in the process? When and how frequently will feedback be given?). The answers to these questions should also be clear, from a practical perspective, even if the process is in a steady state and not undergoing revision. For FORTX, the purpose of the process is primarily compensation for performance, with a focus on development; the measures are largely quantitative, with a major emphasis on financial and operational measures (see Exhibit 7.1); and involved in the evaluation are both the compensation committee and the full board. The steps in the process have been described earlier in the chapter.

Conger, Finegold, and Lawler (1998) highlight three forces driving interest in CEO performance evaluations, that still operate today and include: (1) the general awareness of the critical roles played by CEOs; (2) shareholder activism, pressuring boards to take more responsibility and action for CEO performance evaluation; and (3) the evolution and enhancement of performance management systems and processes, including the use of 360-degree feedback. It should be clear that these forces, as well as the more recent legislative reforms and regulations, have certainly shaped the CEO performance management process at FORTX, with the greatest impact coming from shareholder activism and the broader scope of legislation and reforms affecting most large organizations.

Conger, Finegold, and Lawler (1998) also note four major outcomes of CEO or performance management: (1) raising the accountability for performance and defining the link between performance and compensation; (2) clarifying strategic direction; (3) promoting better CEO-board relations; and (4) fostering the development of the CEO. For FORTX, the CEO evaluation process has increased the focus on accountability, including the use of better measures of organization performance, and it has more clearly linked these measures to CEO compensation. This has led to a sharpening of business strategy—better and more quantitative measures have helped FORTX to focus most appropriately on each of its major objectives, and the ongoing nature of the feedback process has helped to keep CEO and firm performance on track, strengthen the relationship with the board, and in particular, with the board chairman, which has allowed for, as discussed earlier, a greater focus on development for both the CEO and the senior leadership team.

Conger, Finegold, and Lawler (1998; see also: Boren & Heidrick, 2004; Johnson & Bancroft, 2005; Nadler, Behan, & Nadler, 2006; Oliver Wyman, 2003; Rivero, 2004) describe the three typical steps in an effective CEO evaluation or performance management process. From the discussion of FORTX ‘s process, you will note that FORTX’s steps are similar, but at FORTX, there is no formal mid-course review; feedback is more informal, primarily in discussions between the CEO and the chairman. The three typical steps are listed below. You will also find a summary of considerations for the overall CEO performance management process in Exhibit 7.4 (detailed considerations for goal-setting, feedback, and appraisal appear in subsequent tables).

CEO Overall Performance Management (PM) Process—Considerations.

Ensure the PM process is driven by the organization’s strategic plan.

Detail and document all aspects of the PM process—roles, responsibilities, timelines, process flow, and so forth.

Align the PM process calendar and timelines with the corporate calendar. Involve the CEO, the compensation committee, and the full board in goal setting.

Provide performance feedback on a regular basis to the CEO, both informally and formally. Base the CEO’s overall PM evaluation on the extent to which agreed-to targets were achieved, and include input from the CEO via a self-appraisal, the compensation committee, and the board chairman, as well as all other board members. Award compensation based on agreed-to levels of goal attainment.

1. Establishing evaluation targets at the start of the fiscal year

· CEO and board develop an annual strategic plan, setting short-and long-term objectives

· CEO sets personal performance targets and measures, and should include development goals

· Presentation to board committee (compensation and/or governance), and then to final board, along with financial rewards for performance

2. Reviewing performance mid-course

· CEO use of board meetings to highlight achievements

· Individual meetings with board members for performance feedback

3. Assessing final results at year-end

· CEO writes self-evaluation

· Board members assess performance, using narratives and rating scales

· Compensation committee and board make compensation decisions

Conger, Finegold, and Lawler (1998) make additional recommendations, including the need to take into consideration those actions that the CEO can control directly, that objectives should go beyond just the financial, and that input from customers and employees and benchmarking within and outside the industry of the CEO’s performance should be considered when evaluating overall performance. Nadler, Behan, and Nadler (2006), Oliver Wyman (2003), and Rivero (2004) suggest three broad areas of focus for CEO performance dimensions or goals: bottomline impact (for example, financial success, as measured by net operating revenue, operating cash flow, net income earning per share, among others); operational impact (for example, improvements in organizational functioning, products, and strategy implementation, as well as morale, customer satisfaction, research and development, and others); and leadership effectiveness (for example, the CEO’s actions and personal impact, including meeting and addressing the needs of key customers, identifying a successor, and building relationships with external stakeholders).

Regarding the preceding set of recommendations, it is fair to say that the measures and targets established at FORTX are not largely in “direct control” of the CEO; his actions, for example, cannot directly increase cash flow. The objectives do go beyond the financial (see Exhibit 7.1 ), and the CEO’s performance is benchmarked against similar companies. Although the CEO does submit the Boardroom Metrics (2005) CEO self-assessment along with the narrative evaluating overall performance, and the self-assessment does focus on CEO actions and behaviors, it does not play a major role in the overall evaluation but it may influence decisions regarding the CEO’s overall success, tenure, discretion related to compensation, and other items.

Charan (1998) recommends that CEO evaluations have both a look back and a look forward and that boards consider the following questions:

· Is the CEO building for the future?

· Does the company’s strategic direction reflect reality, considering opportunities and challenges?

· Does the CEO have a firm understanding and grasp on company operations?

· Is the CEO creating the management team of the future?

· Is the CEO building positive relationships with external stakeholders?

· Is the CEO delivering results?

Rivero (2004) also suggests clarifying the extent to which the overall process is “backward facing,” in that it focuses on past performance, and “forward facing,” in that it focuses on future objectives and whether the CEO has the competencies and vision to achieve those objectives. According to Oliver Wyman (2003), backward-facing evaluations focus on organization performance and CEO compensation, as measured by goal accomplishment and other quantitative measures; forward-facing evaluations focus on CEO capability and CEO development, measured through the quality of the CEO’s vision and strategy and other qualitative indicators. Both objectives are important. Charan (1998) suggests creating two processes, with the board using the look back to determine annual compensation and the look forward to evaluate the CEO’s total leadership and to provide feedback. Although best practice would suggest separating discussions of both process objectives, for example, as it is done at Honeywell, due to a number of practical considerations, the discussions can be combined if done well, for example, as done at Target Corporation (Oliver Wyman, 2003). See Exhibit 7.5 for an overview of considerations for CEO goal setting.

FORTX’s process tends to combine both looks, but it does not explicitly call for separate conversations. For example, its quantitative measures, such as earnings per share, not only assist in evaluating past performance, but also provide a look to the future and help to answer the question of whether the CEO is positioning FORTX for further growth. Measures such as customer satisfaction and employee satisfaction also operate similarly. In contrast, a measure such as an increase in stock price (not a measure used at FORTX) could only be backward-facing. As mentioned earlier, the CEO’s self-assessment contains an evaluation of leadership behaviors (see Exhibit 7.2 ), and this assessment, which can be considered more forward-facing, does focus on the questions and recommendations raised above by Charan (1998), Oliver Wyman (2003), and Rivero (2004).

CEO Goal Setting—Considerations. Set both short-and long-term goals and objectives in the context of the strategic plan.

Establish measures and metrics for each objective.

Utilize both quantitative and qualitative objectives.

Go beyond financial objectives alone and consider the needs of stakeholders such as employees, customers, the community. Identify CEO key competencies and behaviors and set appropriate measures and metrics.

Set backward-facing objectives for the year-end evaluation to determine firm and CEO performance.

Set forward-facing objectives (development focused) to emphasize CEO development.

From a process perspective: The CEO, using the context of strategy, drafts the goals and objectives and reviews key financial and operational metrics with the CFO and development objectives with the chief human resources officer.

The CEO reviews the goals, objectives, measures, and metrics with the compensation committee with the purpose of coming to initial agreement and determining how the goals and objectives link to compensation.

The CEO and compensation committee review with the full board the goals, objectives, measures, and metrics and how they will drive compensation and work toward agreement and final approval.

Most authors (Conger, Finegold, & Lawler, 1998; Nadler, Behan, & Nadler, 2006; Parmenter, 2003; Rivero, 2004; Silva & Tosi, 2004; Tyler & Biggs, 2001) argue for the use of 360-degree feedback for evaluating more subjective goals, obtaining anonymous input from a broader and wider audience, and to provide feedback for development to help the CEO understand what actions help or hinder his or her effectiveness. In fact, research by Silva & Tosi (2004) suggests that guaranteeing board members anonymity when it comes to evaluating the CEO will increase the likelihood of more reliable and valid ratings of CEO performance. Among the above group of authors, however, there is some disagreement as to whether 360-degree feedback should be used for administrative purposes or only for development. In either event, Sala (2003) shows that senior executives had greater discrepancy between self-and other-ratings than lower-level managers and individual contributors—further supporting the use of 360-degree feedback for CEOs—and suggests that this may be due to the lack of others above them in the hierarchy who have the opportunity to provide feedback and that managers and leaders at lower levels in the organization may be less inclined to give constructive feedback to those at higher levels. You will recall that FORTX’s chairman has engaged a consultant to provide 360-degree feedback for the CEO and the senior leadership team. In terms of raters, specific guidelines were given, and they included, at least for the CEO, that a minimum number of board members and direct reports must be invited to participate in the process. At this time, 360-degree feedback is being used solely for development purposes, and no decision has been made as to whether or not this feedback will be incorporated in the CEO performance management process on a more formal and regular basis. Considerations for CEO feedback are listed in Exhibit 7.6.

Charan (1998) provides several process options for capturing feedback on the CEO’s performance for the year-end evaluation or appraisal. The first involves a single board member, perhaps the chairman of the compensation or governance committee, soliciting and then synthesizing the feedback he or she gathers from each director independently. Another involves governance or compensation committee members dividing the task of obtaining feedback in one-on-one sessions, synthesizing the feedback together. A third approach is to use a questionnaire, with both structured and open-ended questions, to collect feedback from each board member, and then to have the committee chairman analyze and synthesize the feedback.

CEO Feedback—Considerations.

· Articulate the framework for providing feedback, including, for example, who delivers the feedback and when it is delivered, as part of the overall performance management process.

· Provide the CEO feedback in both formal and informal ways.

· Ensure the board chairman and committee chairs have informal and formal opportunities to provide feedback.

· Feedback can be delivered informally, on event, via telephone, email, or in person.

· Informal feedback can also be delivered after executive sessions held by either the full board or a board committee.

· Focus feedback primarily on progress toward objectives, CEO development, and, as they arise, any critical business or operational issues.

· Utilize a mid-year review, which can be more or less informal, as an opportunity for an extended and focused performance and development conversation.

· Formal feedback, in the context of performance management, at least take place during the year-end appraisal conversation.

· Feedback can be collected in a number of ways, for example, via a 360-degree feedback survey or through interviews with board members.

Nadler, Behan, and Nadler (2006) discuss a number of ways of delivering feedback, including one-on-one sessions by the board leader or the chair of the appropriate committee (for example, the governance or compensation committee); they also state that the person delivering the feedback should have both the trust and the respect of the board and the CEO. One recent study (What directors think, 2005), reporting on who provided the feedback to the CEO after the year-end evaluation was completed, showed that 54 percent of the time it was the compensation committee chair and 18 percent of the time it was the board chair.

Finally, Charan (1998) suggests delivering the feedback in two steps. In the first step, two board members present the feedback to the CEO in private. Using two board members helps to make delivering the feedback less dependent on the personality of a single board member. In step two, at a board meeting, the full board and the CEO discuss the feedback and the CEO’s response to it. This step helps to verify and ensure that the feedback was delivered accurately and understood.

Reviewing FORTX’s year-end feedback process in light of the literature, we find that the compensation committee plays the key role in reviewing the CEO’s performance, analyzing the self-assessment, and making a recommendation to the board. The board then reviews the recommendation and comes to a final agreement regarding CEO performance and compensation. The chairman is responsible for providing the board’s overall evaluation feedback to the CEO. Obviously, the feedback is delivered in a one-on-one session. It is also a one-step process; it does not include Charan ‘s second step, a follow-up discussion with the CEO and the full board. In Exhibit 7.7 , you will find a summary view of considerations for the CEO’s overall year-end evaluation or appraisal.

Barriers to Effective Implementation of the CEO Evaluation or Performance Management Process

Oliver Wyman (2003) cites four main barriers to the effective implementation of a CEO evaluation or performance management process:

· Uncertainty concerningboard memberroles and responsibilities, primarily caused by the number of stakeholders involved in the process and its unfamiliarity to most board members. To address this, the board should have a clear charter describing roles and responsibilities in connection with the overall CEO performance management process, using, perhaps, the three typical steps discussed earlier in the chapter as the framework for outlining who does what and when they do it.

· The lack of time and energy given the board’s overall responsibilities—as will be discussed shortly—directors spend only sixteen to twenty-two hours a month on board-related work, which is typically time spent on strategy, monitoring performance, and so forth. Boards need a well-designed process, integrated with their overall work efforts both in and out of formal committee and board sessions, to help them to accept accountability for and efficiently and effectively engage in the performance management of the CEO.

Exhibit 7.7 CEO Appraisal—Consideration.

CEO Appraisal—Consideration.

· The year-end appraisal is the prime opportunity for formal feedback.

· Encourage the CEO to prepare a self-appraisal, providing context, background, and rationale that can help to explain the extent to which the goals and objectives were achieved.

· Encourage the CEO to complete an assessment of his or her development goals and behaviors, either via a narrative, a survey checklist, or as part of a 360-degree feedback process.

· Collect feedback on CEO performance from board members and others, for example, the CEO’s direct reports.

· Use a 360-degree feedback process to evaluate and support development efforts; use judiciously if it is intended to affect the evaluation of overall performance.

· Base the CEO’s overall evaluation on both those goals and objectives that are tied to compensation and those that are not, as not all goals and objectives link to compensation directly.

· The compensation committee should initially assess and evaluate the CEO’s performance, as well as review the CEO’s self-appraisal, and then present its findings to the full board for review and final determination of overall performance and compensation.

· The board chairman and the chair of the compensation committee should jointly deliver the year-end performance evaluation to the CEO, with a focus on corporate performance or more back-facing objectives. A second, separate discussion, more forward-facing, should focus on the CEO’s progress against development goals and consider the CEO’s capability to lead the organization into the future.

· As a final step, the full board should meet with the CEO to discuss the CEO’s overall performance evaluation and the CEO’s response.

· Disagreement over the criteria for the evaluation, which can occur among board members, as well as between board members and the CEO, based on their own views of what is important. Therefore, it is critical to spend ample time at the beginning of the process coming to agreement on goals, measures, and metrics and to be sure that they are the best possible for effectively evaluating business and CEO performance and success.

· A lack of information about qualitative performance, because, in general, most boards spend their time gathering and evaluating quantitative or “hard” data, and they find it difficult to define, collect, and measure qualitative performance in valid and reliable ways. This can be remedied by engaging the chief human resources officer to identify a professional resource that can help the board put in place a sound and appropriate measure, such as a 360-degree feedback survey.

Nadler, Behan, and Nadler (2006) add director intimidation or fear of delivering a difficult appraisal to the list. Underlying this fear is the anticipated reaction of the CEO, who more than likely will have a difficult time accepting any constructive feedback. Finally, Tyler and Biggs (2001) add the failure to explicitly define the totality of the CEO’s responsibility and authority, which of course would make any subsequent evaluation quite arbitrary, and the concern that the special nature of the boardCEO relationship will be disturbed, making board-CEO relations more difficult, at least in the short run.

From FORTX’s perspective, these barriers did not affect the creation of the CEO evaluation process. At FORTX, given its history, as well the continuing legislative reforms, the board’s sense of accountability, responsibility, and empowerment is extremely strong: the board needs to ensure all aspects of governance are of the highest standards.

High-Level Assessment of the CEO Performance Management Process

Oliver Wyman (2003) suggests a number of questions to use to assess the quality and comprehensiveness of a CEO evaluation or performance management process. These questions reflect, to some extent, the recommendations for an effective process suggested by Charan (1998), Oliver Wyman (2003), as well as Rivero (2004). However, the questions also encourage a step back and a higher-level view of the process. These questions include:

· Is there an explicit description of the overall process?

· Is there an explicit process calendar with deadlines and milestones?

· Is the process calendar aligned with the corporate calendar?

· Does the process include a mid-year check-in?

· Does the process include a focus on CEO development and opportunities for development feedback?

· Is the process consistent with the company’s values and culture?

· Can the process be revised as needed to ensure overall quality?

In the context of FORTX’s overall process, most of the above questions have already been addressed and answered favorably, by and large. The key question that seems to remain unanswered is the last. Evidence does suggest that FORTX’s CEO performance management process can be revised. Consider, for example, the recent introduction of 360-degree feedback for the CEO and the continuous improvement in the quality and relevance of measures and metrics, which resulted in the recent launch of the FORTX company scorecard.

Increasing the Effectiveness of the Board of Directors

Composition and Effectiveness of the Board

Given the board’s critical role in the CEO performance management process, it is important to ensure that each board member, board committee, and the full board can function, in general, as effectively as possible. To that end, what follows is a discussion of how to increase board member effectiveness and improve the composition of the board, as well as findings related to board and board member evaluations and the influence of board member compensation on the monitoring of CEO performance. You will find in Exhibit 7.8 , however, considerations for improving board member effectiveness, specifically in the context of performance management.

Although board member independence (being a board member, but not a company insider) has been touted as desirable, Kocourek, Burger, and Brichard (2003) state that research to support whether board independence correlates with company financial performance (quantitative) is inconclusive. The authors go on to discuss the need for qualitative reform, indicating the importance of:

· Selecting the right board members—with the right competencies, expertise, and personalities

· Training the board members regularly—helping them to acquire a thorough understanding of the business

· Giving the board members the right information—providing both credible and comprehensive information, both quantitative and qualitative

· Balancing the board and the CEO’s power—letting independent directors select new directors, hold executive sessions, and control committee chairmanships

Exhibit 7.8 Increasing Board Member Effectiveness at Performance Management—Considerations.

· Include experience with CEO evaluation and executive compensation as selection criteria for any new board member.

· Train board members on the principles of effective performance management and the key aspects, especially the rules and regulations that influence executive compensation.

· Coach board members on how to deliver feedback effectively and constructively.

· Provide board members with regular and frequent updates on the CEO’s performance against goals.

· Evaluate board members on their ability to effectively execute their roles in the performance management process.

· Compensate board members with equity, to the extent possible, to drive motivation and a long-term perspective.

· Nurturing a culture of collegial questioning—creating an atmosphere of mutual confidence and trust

· Gaining an adequate commitment of time—establishing benchmarks for expected participation

· Measuring and improving performance—establishing board performance metrics and evaluations

Recent surveys give a picture of progress of the extent to which boards are growing more effective. For example, from a 2005 survey (Mercer Delta Consulting), we find that directors felt their boards were primarily independent of management, they voiced opinions that conflict with the CEO’s, they were provided sufficient information and adequately informed, and they worked well with senior management. Another survey (What directors think, 2005) reveals that corporate directors say they are not satisfied with their succession planning efforts, although they are effective in overseeing CEO compensation, and that the CEO is still primarily responsible for setting the board meeting agenda. This survey also reveals that directors are receiving enough financial and business information, but not enough information on employee and customer satisfaction.

Both of the above surveys report that director training, although improving, is still a need and that, from a time perspective, directors are spending anywhere from sixteen to twenty-two hours a month on board-related work.

Finally, a number of authors (Brountas, 2004; Charan, 2005; Nadler, Behan, & Nadler, 2006) provide recommendations for how to conduct full-board and committee-level evaluations (a listing requirement of the NYSE), as well as recommendations for evaluations of individual directors. Brountas (2004) and Charan (2004) remark that the assessment of individual directors is gaining acceptance, even though the process has not been favored historically because directors prefer not to be in the position of evaluating their colleagues. While the ‘What directors think” (2005) study reports that 84 percent of those surveyed say that the entire board’s performance is evaluated on a regular basis and that 67 percent say those evaluations are effective, only 37 percent responded that individual board members are evaluated on a regular basis, but 70 percent say these evaluation are effective. From the Mercer Delta Consulting (2005) survey, we find that 71 percent and 70 percent of respondents say, respectively, that the board evaluation and committee evaluations are effective.

What about FORTX? Given its history, it has gone to great lengths to select board members who can bring the needed talent, expertise, and experience to FORTX. There are regulatory changes that drive board member training, and the FORTX board is advised of those changes and avenues for training, as well as other recommended training, by its legal counsel. FORTX also provides board members, on a regular basis, with informal training on matters of company operations, strategy, business unit operations, and so forth, and board members also receive necessary updates at board meetings to help them understand changes in the business. Board members, as well, do receive credible and comprehensive information, both quantitative, for example, provided by FORTX’s enterprise-wide reporting system, as well as more qualitative information, provided, for example, by FORTX’s annual employee opinion survey. Although the CEO may participate and can have input, processes such as conducting searches for new board members, determining committee chairmanships, and others are under the board’s control. The board culture, as well as the board-CEO relationship, can be characterized as more cooperative than not, and mutual confidence and trust continue to grow as FORTX has been enjoying a relative turnaround in its performance. FORTX clearly articulates and communicates the expected commitment of time required for board and committee membership, as well as the time needed for work in preparing for board sessions, work in between sessions, training, and other measures. Finally, evaluations are done in executive session by each committee and the board overall. There is no process in place for individual board member evaluation.

Compensation of Board Members

It appears that how board members are rewarded influences how they monitor and evaluate CEO performance. Silva (2005) found that board members who receive stock as compensation for their membership use more quantitative (for example, inan-cial) information in their evaluations, maximizing the interests of shareholders, consistent with agency theory. The use of stock as compensation was negatively correlated to the use of qualitative information, but board members who tended to receive higher salaries as compensation tended to use quantitative criteria to a lesser extent. Finally, board member motivation was positively correlated with the use of quantitative information and negatively correlated with the use of qualitative information.

Compensation for FORTX’s board members, consistent with a long-term focus, is in the form of equity, although members have the discretion of choosing up to 50 percent of their compensation in cash. Summary and Recommendations

The CEO performance management process continues to evolve, with corporate scandals, shareholder activism, legislation, and regulatory reforms providing significant impetus for the introduction of greater rigor and transparency to the overall process. Boards of directors, as a result, have received a wake-up call and are growing ever more accountable for ensuring effective corporate governance, including CEO performance management and compensation. Boards are also growing more satisfied with their progress and effectiveness, overall, as evidenced by recent surveys (Mercer Delta Consulting, 2005; What directors think, 2005). Finally, as Nadler, Behan, and Nadler (2006) report, if not for the recent requirements, countless CEOs would continue to go on as they did before, without a formal performance review.

Where does this leave us? For as much research as there is behind performance appraisal and performance management (focused mostly, however, at lower levels in organizations), there is room for improvement in its application in organizations. For example, recent employee opinion survey results show that only slightly more than the majority of FORTX employees believe that performance management is a valued process at FORTX. FORTX does have a strong, if not a best-in-class, web-based performance management system and process, supported by extensive instructor-led and online training, as well as other related support tools and process guidelines. However, 2008 employee opinion survey results for four key performance management questions, when compared to Towers Perrin-ISR’s (2007) proprietary employee opinion survey norms based on a group of thirty-five “high performing” organizations, show FORTX scoring somewhat lower on two of four questions. The four survey questions are

· My manager provides me with ongoing feedback that helps me improve my performance (FORTX scored lower, 64 percent versus 72 percent favorable response)

· I have a clear understanding of how my performance is evaluated (FORTX scored lower, 66 percent versus 78 percent favorable response)

· My most recent year-end performance appraisal was fair (FORTX scored equal, 73 percent favorable response)

· I am satisfied with the amount of recognition I receive from my manager (FORTX scored higher, 65 percent versus 57 percent favorable response)

Although survey results show there is still some need to enhance the typical performance management process even across high-performing organizations, the process can still provide a framework and basis for CEO evaluation. In fact, the three steps discussed earlier for an effective CEO evaluation are similar to what might be called a more generic fundamental performance management process (see, for example, Mone & London, 2002). Slowly, it seems, boards and CEOs are building processes that have, to some extent:

· Goal setting (which, frankly, has been more organizational than personal and more quantitative than qualitative)

· Ongoing feedback (either formal or informal, at board meetings or in one-on-one sessions with directors)

· A year-end evaluation (usually with metrics and a set of targets)

· The capability to better match performance and compensation (compensation ranges are usually set in connection with quantitative targets, limiting the discretion of the compensation committee or board to behave in more arbitrary ways)

· A CEO self-assessment component

Where do we go next? There is still more to learn about the effectiveness of the current practice of CEO performance management. To date, the prime focus has been just putting a CEO evaluation process in place. What follows is the need to ensure that the efforts of boards and CEOs are not just about compliance, but also about full engagement and commitment to the process. This will involve a number of factors. The first is the need for boards and CEOs to genuinely accept and grow more comfortable with the idea of a rigorous CEO performance evaluation, and, by and large, recent surveys are indicating just that. Second, board members need to continue to improve their ability to work with CEOs to set meaningful goals and targets, monitor performance and provide constructive coaching and feedback, and to rigorously evaluate CEO performance. Part of the difficulty, however, lies in the fact that board members themselves are often other CEOs or senior executives, who may not even have effective evaluation processes in their own organizations. Third, CEOs will need to grow more comfortable with the performance management process and continue to improve their ability to partner with their boards throughout the process. Fourth, training for board members was discussed earlier in this chapter, but that was in the context of learning about the company, its strategy, challenges, and so on, as well as the need to meet any regulatory requirements. Training board members in the practice and skill of delivering feedback and in executing on all other phases of the evaluation process would not only increase their comfort, but also make them and the process more effective.

Continuing research with respect to the above four factors will be important. In addition, those counseling and advising today’s boards and CEOs have an opportunity to shape the process more immediately. There is less mystery surrounding boards today than ever before, and as the mystery continues to unfold, it becomes clear that a board is a group, if not a team, targeted with a mission and set of responsibilities. Senior HR executives working within their organizations can provide counsel to their CEOs regarding group and team dynamics to help improve overall board functioning and, perhaps, may be positioned to advise the board chairman; they can also, as necessary, work to gain the ear of the chairman or compensation committee leader to guide and influence CEO behavior. Senior HR executives can also work with and engage a variety of consultants to help them shape overall board behavior and the interaction between the board and the CEO. A number of authors (LaFasto & Larson, 2001; Larson & LaFasto, 1989; London & London, 2007; Nadler, Spencer, & Associates, 1998; Sessa & London, 2006) provide useful insights and practical approaches for improving team effectiveness. HR executives can also use their expertise, from a selection perspective, and perhaps working closely with the board chairman, to identify the skills and requirements necessary to be an effective board member and to help the board to select new board members (see, for example, Nadler, Behan, & Nadler, 2006).

The pressures facing today’s corporations, boards, and CEOs are certainly challenging. It is unlikely that these pressures and challenges will subside in the near future, and it is also unlikely that stockholder and shareholder activism will decline. In addition, there may still be room for further legislation and reforms. As we consider what may be ahead, our opportunity is to take advantage of the current and probable future climates to further drive rigor and effectiveness in today’s and tomorrow’s CEO performance management process.

EXHIBIT 4.3

Best Practices for Manager-Coaches.

1. Coaching relationship	· Take time to explore what is important to the person you are coaching—his or her goals, values, and motivations. · Communicate your desire to help the person develop and ask what kind of coaching he or she would like from you. · Communicate the positive expectation that you believe in the person and his or her ability to learn and make significant progress on objectives.
2. Insight	· Clearly communicate expectations and success factors. · Provide feedback and discuss performance relative to those expectations. · Ask questions that help people reflect on their own behaviors, performance, and impact.
3. Motivation	· Help people clarify their goals and motivations related to work and to their own development. · Identify specific personal and organizational benefits for development.
4. Capabilities	· Provide specific advice and guidance on how to improve performance and behavior. · Encourage them to prepare development plans. · Support training, stretch assignments, and provide opportunities for on-the-job learning.
5. Real-world practice	· Ask people what exactly they will to do to make progress on their development objectives, and where and when they plan to do it. · Help them find or create opportunities that stretch their capabilities.
6. Accountability	· Hold regular (for example, monthly) conversations to gauge progress against development objectives. · Ask people what they have learned recently and what they will do in the next month to continue learning.
7. Organizational context	· Ask people what organizational barriers are getting in their way and brainstorm ways they can work around them. · Be a role model of learning by seeking feedback and coaching from others, sharing development priorities and progress openly, and talking about why development is important to you personally.

REFERENCE

Smither, J., & London, M. (2009). Performance management: Putting research into action. San Francisco, CA: Jossey-Bass.