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16 16 CEO/STRATEGY 12 Key Thoughts and Metrics on CEO Performance Evaluation By Laura Dyrda M ost organizations include a mix of qualitative and quantitative metrics when evaluating CEO perfor- mance, according to the "Hay Group/Agenda 2015 CEO Performance Evaluation Survey." Hay Group collected data between Aug. 25, 2015 and Sept. 23, 2015. ere were 147 board and C-suite executives that responded to the survey. e survey included organizations from across the spectrum of industries, 12 percent of which were healthcare or pharmaceutical companies. e survey also included manu- facturing, financial services, education and information technology executives. Here are 12 key thoughts and metrics for evaluating a CEO's performance. 1. e person who led a CEO's performance evaluation varied, although it was most of- ten the head of the compensation committee among the organizations surveyed. Here is the breakdown on who led 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 orga- nizations reported discussing performance with the CEO once per year; 20 percent con- ducted two performance discussions per year. e majority — 58 percent — reported a for- mulaic link between the performance evalua- tion and CEO compensation. 3. While most organizations reported es- tablishing 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 direc- tors 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. e 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. e CEO's direct reports oen didn't par- ticipate 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 per- cent of the organizations — reported board managers provide feedback, and 68 percent had CEOs conduct a self-evaluation. However, of those organizations in which the CEO was self-evaluating, the information didn't strongly impact the overall perfor- mance review and was instead used as sup- porting information. 6. e top five most common primary cate- gories for evaluating CEO performance were: • Financial performance: 98 percent • Strategy development/execution: 92 per- cent • Operating performance: 88 percent • Leadership skills: 77 percent • Succession planning/internal talent de- velopment: 65 percent Around half of the organizations also evalu- ated board relationship and engagement as well as shareholder/external stakeholder en- gagement. 7. Revenue and sales was a primary financial metric affecting the CEO's performance eval- uation 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. e organizational direction was a primary metric in 59 percent of the organizations and product/service innova- tion was a primary metric for 37 percent of the organizations. Technology as a driver for growth was only part of the CEO's performance evalua- tion in 20 percent of the organizations. 9. e 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 perfor- mance evaluation in 18 percent of the orga- nizations. 10. When evaluating the governance met- rics, 88 percent of the organizations evaluat- ed their CEOs on effective relationships with the board, including transparency, candor, access to management and ongoing com- munications with the board. More than half — 59 percent — valued compliance with the legal/regulatory standards as a primary gov- ernance metric. e CEO dashboard/score- card 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 eval- uate the CEO. ere were 44 percent who re- ported using employee engagement as a met- ric to evaluate performance and 40 percent said the same of customer/client satisfaction. 12. e 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 n