19 Mar 2015 17:26 IST

How to evaluate a CEO’s performance

Assessment of a CEO on a regular basis is as crucial as selecting the right candidate

It is important for a board to be diligent in evaluating a CEO’s performance.

The human resource team usually collects inputs from various sources and assesses individual performance on multiple dimensions.

A proper evaluation of the CEO and the executive team is critical to a company’s performance. The evaluation framework of the CEO can be summarised in two points: business strategy formulation and execution.

With time, we have realised that there is no challenge in formulating and executing the right business strategy. Instead, it’s about asking the right questions. Asking a wrong question can result in slanted strategic and operational plans.

The assessment of a CEO on a regular basis is as crucial as selecting the right candidate.

The answers to the following questions form a very important part in analysing the CEO’s performance along with the earnings and sales targets. Do they conduct themselves in a way that inspires followers to trust them?

• Are they comfortable delegating important tasks to others?

• Are they too harsh/too soft with their team.

• Do they spend time developing other leaders?

• How much time do they spend communicating the company’s vision, purpose and values? Do people ‘down the line’ apply that vision to their day-to-day work?

• How comfortable are they sharing information, resources?

• Do they energise others?

• Are they comfortable with sharing credit or praising their team?

• A 360 degree feedback is the only way the board can find truthful answers to these questions. The board needs to talk to its immediate subordinates to understand and analyse the reasons for gaps, if any. The CEO’s is the most coveted position but the least understood job in a company.

While the formal board of directors have legally defined duties and responsibilities, it becomes difficult to give formal feedback to the CEO since there is no clear agreement on what the CEO should actually be doing. While the CEO’s role entails being ultimately responsible for delivering returns to shareholders, the next level of detail is usually missing.

Evaluating a CEO is nothing like evaluating a regular employee. There has to be a protocol, which does not demean the value of this position. This whole process involves six different steps. This may include corporate strategy, setting up an appropriate human resource team, making available capital and other resources, build a proper corporate culture, making wise decisions and delivering.

Evaluators have been following a scorecard, which can justify the key responsibilities of a CEO. The scorecard may include the following key evaluation questions.

The most accommodative way is to ask all the board members to fill out a scorecard on two different aspects, giving the CEO grades from A to F in each category.

Additionally, the same report card can be given to the CEO to rate his own performance in each area. The best way is to sit with the CEO and discuss the review. If the CEO is executing plans well in each of the areas, shareholder value will follow.

Ultimately, CEOs are accountable for delivering high quality performance.

The purpose of evaluating a CEO performance directly is that it otherwise takes years to see how things play out. Instead of just waiting to see what happens, the CEO must work with his management team to understand the key metrics in each area that will lead to superior performance.

The writer is Group CEO, Quintessentially Lifestyle, a luxury concierge service