Five Elements of an Effective CEO Evaluation

Five Elements of an Effective CEO Evaluation
Five Elements of an Effective CEO Evaluation
By Amanda Skeene, Project Analyst

In coordination with the Strategic Plan development process, TransPro has worked with high-performing agencies to revamp their CEO evaluation framework. Recently, an agency in the Mountain West embraced an outcomes-based system and developed a new CEO evaluation framework for the upcoming fiscal year. This agency’s evaluation development process was driven by five key factors:

  1. Clearly Defined Success Outcomes Connected to the Strategic Plan
  2. Balance Between Objective and Subjective Measures of Success
  3. Clarity of CEO Outcomes Communicated at Beginning of Year
  4. Regular Feedback Between Board Chair and CEO
  5. Compensation Tied to Results

Here’s how these five factors work together to produce an effective CEO evaluation.

First, the annual evaluation criteria should clearly align with the agency’s annual strategic goals. Success for a CEO should be reflective of the definition of success for the agency. To achieve this, boards must be cautious in their approach to identifying evaluation criteria. The role of the board is not to define activity, but to outline clear outcomes that the CEO must deliver, for example, to achieve a 5% increase in overall customer satisfaction by December 31, 2022. This is a good example because it is an outcome that leaves no room for subjectivity, and there is only one way to define success.

Second, there should be a balance between objective and subjective measures of success. Objective measures are the clearly defined outcomes that the agency is striving to deliver. These may relate to measurable elements such as customer satisfaction or financial performance. Subjective measures are designed to evaluate the spirit by which the CEO approaches their work. These may relate directly to the agency’s values that describe the guiding principles by which employees approach their work.

Third, the evaluation criteria should be communicated with the CEO at the beginning of the year (or evaluation period). By doing so, the CEO can work with their management team to develop a work plan for the year, focused on delivering the outcomes.

Further, there should also be regular feedback between the chairman/president of the board and the CEO. Establishing a regular cadence of monitoring progress towards achieving the outcomes and providing constructive feedback to the CEO will ensure that the agency is set up for success.

Finally, the CEO’s compensation should be tied to the results of the annual evaluation. The Board should establish a compensation framework that is shared with the CEO and incorporated in the contracting structure. This framework can consist of both base compensation increases and annual incentive compensation.

As an agency develops an executive appraisal process, these five elements are key to its success. By following this framework, a high-performing agency will have clarity in its definition of success, opportunity to develop a healthy board-CEO relationship, and an outlet to provide additional guidance or praise to the CEO where it is due.