CEO performance and reward is the subject of growing social, political and media scrutiny, and can at times be a sensitive issue for Boards to navigate.
“As the end of the performance year approaches, CEOs will naturally have expectations around their upcoming remuneration discussion. There will also be an expectation from shareholders for CEO remuneration to align with performance, and for proper market benchmarking to be performed,” says Barry Bloch, Global Partner for Board and Executive Leadership. “But when Boards tread too lightly in their duties to manage these areas, they fall short of both sets of expectations.”
Here we explore why outlining expectations, managing performance and remuneration for the CEO matters, and how Boards can deliver on its duty more effectively.
Why is CEO performance and reward important?
According to Barry, Boards tend to skip too lightly over the issues surrounding a CEO performance and consequently, their remuneration, when they are fearful of upsetting the CEO – or when they fear the implications of a formal process or lack the skills to manage one. However, this is a critical error. When Boards avoid these conversations, they miss the opportunity to connect honestly with the CEO about performance issues which can end up limiting the performance of the CEO.
“By taking a thorough, targeted and data-informed approach, Boards can lift CEO performance, lift organisational performance, and achieve stronger alignment with the expectations of CEOs, shareholders and other stakeholders,” he explains.
Adhering to the regulations is another factor for Boards to consider. “In Australia, the ASX’s two-strike rule means that if more than 25 per cent of shareholders vote against the Board’s annual remuneration proposals, two years in a row, the Board is spilled,” says Barry. “This requirement puts additional requirement on Boards to accurately assess CEO performance.”
Despite the significant investment made into attracting, retaining and developing CEO talent, and the impact that CEOs can have, and the many other compelling reasons for effectively managing performance and reward, these processes often lack structure, rigour and discipline when it comes to the CEO. “There is a history of Boards being too cautious, but for the Board to be effective in its governance, it must be more considered and rigourous in its approach,” he continues.
How to effectively manage CEO performance and reward
In driving and rewarding the performance of CEOs, there are four key considerations for Boards.
1. Set clear goals that align with the vision and strategic goals of the organisation
“Beyond financial and operational performance, it is critical for the CEO’s performance goals to include both community and social considerations and team and talent considerations. This requires clear goals to be set that can be effectively measured both quantitatively and qualitatively,” says Barry. “Performance at any level is part of both our employment and psychological contract, so, as a minimum the same principles and processes need to apply to the CEO.”
2. Build the culture and mechanisms for continual feedback
Whether you are a CEO or a frontline supervisor, most people want to understand their own performance and how it can be improved. As the leader of the organisation, in addition to strategically aligned goals the CEO must receive quality feedback on their performance and Chairs need to have a line management approach to their relationship with the CEO to ensure performance accountability.
“With the Chair as the line manager and the CEO as the direct report, the Board is expected to work collaboratively through the Chair to hold the CEO to account, to assess performance and build a positive relationship of accountability,” says Barry.
Barry also stresses the importance of understanding Board and CEO dynamics to provide feedback in the right way. “When feedback is provided regularly it can help CEOs to understand which behaviours are and aren’t working, and what needs to change for their performance to improve,” he says. “If we build a culture of transparency in which we can talk to each other openly, respectfully and non-judgmentally, then these conversations can be positive and beneficial for everyone.”
3. Conduct formal, annual data-informed performance reviews
Annual formal performance reviews are another essential tool for managing the performance of CEOs, and there is considerable value in obtaining rigorous 360-degree feedback to inform this process.
“While the CEO is immersed in the organisation, enabling them to be able to see, review and provide feedback on the performance of their own team, the Board is not immersed in the organisation all of the time, so they don’t have a clear line of sight to the day-to-day behaviour, leadership and influence of the CEO,” says Barry. “Because exposure to the CEO is relatively limited, Boards benefit from sourcing independent feedback from a broad representative group within the organisation, that includes direct reports, indirect reports, and critical external shareholders and stakeholders.”
“For CEO performance reviews to be effective, the Board is best to look beyond financial and operational achievements, to closely consider what they're doing in terms of the talent, culture, community and how the CEO leads in these critical strategic arenas,” Barry continues. “Although the performance of the CEO is absolutely about what they’ve achieved, how they go about doing this is a good indicator of the sustainability of their performance and the organisation.”
4. Invest properly in remuneration benchmarking
Remuneration can aid in attracting, retaining and motivating the right talent to perform. Yet despite the strategic relevance and importance of remuneration – and the significant remuneration packages that CEOs attract – many Boards choose not to invest properly in rigorous, independent and quantitative remuneration benchmarking.
“There can be a misconception that sitting on two or three different Boards creates an understanding of what’s happening in the marketplace in terms of remuneration, but this exposure is limited, subject to bias, and does not allow a sufficient data set on which to base these strategically important decisions,” says Barry. “Effective remuneration benchmarking needs to happen annually and look to at least 10 to 15 peer companies for valid comparative data.”
Ultimately, CEO performance and remuneration is an ongoing Board accountability that needs to be implemented with the highest standard of line management process and practice. For guidance on managing the performance and remuneration of your CEO, Board or Top Team, connect with Barry or reach out to your local Gerard Daniels team.