Evaluating the CEO is crucial to an organization’s success. The process provides the opportunity to get the board and CEO on the same page, illuminate areas for improvement, and allow the board to highlight the CEO’s strengths and accomplishments. Conducting a CEO evaluation also demonstrates organizational stewardship and accountability to stakeholders. The process helps the board and CEO maintain alignment between goals set and achievements reached. Evaluation is an element of compensation decisions and helps determine the need for further professional development.
While selecting the CEO is a primary responsibility of the board, evaluating the executive’s performance is equally important. The board should have a formal system for assessing performance at least annually.
The Objective of a CEO Evaluation
The primary purpose of evaluation should be for the board to support or change CEO behavior and clarify expectations. Unfortunately, some boards see evaluation as a tool for determining increases or decreases in pay or for justifying the CEO’s firing. The firing of a CEO should never be a surprise; the CEO should have plenty of warnings that their performance is not at the desired level.
Since performance is only part of salary determination, evaluation should have broader goals. The purposes of the review should be clear and valuable to the CEO and the governing board. Board members and the CEO should jointly develop the evaluation process. Board members should evaluate the CEO’s performance for the following reasons:
- Assess how well the institution is fulfilling its mission.
- Examine and reset, if necessary, goals for the institution and the CEO.
- Support the CEO by providing constructive feedback.
- Develop plans to address issues that arise from the evaluation process.
- Provide an opportunity for the board to learn how its performance affects the board/CEO partnership.
- Foster communication between the board and CEO.
Board members should invest time and energy in the evaluation process because of its potential results, including:
- Clear expectations and realistic goals.
- Strengthened communication.
- Clarification of the responsibilities of the CEO and the governing board.
- Mutual trust, respect, and support among the CEO and board members.
- Renewed confidence in good governance.
- A better sense of the board’s agenda.
Evaluation Process
The evaluation process should be as fair and objective as possible. The board should adopt an evaluation policy and document the process with regular review. Evaluation and performance improvement are ongoing processes, and the CEO’s performance should be assessed formally at least once a year.
The policy should stipulate who will drive the evaluation process and who will be involved. The CEO, the board chair, an executive or compensation committee member, an outside consultant, or a regional vice president of a system may drive the process. The board chair, the executive committee, an ad hoc committee, or the entire governing board can evaluate the CEO.
Most organizations have the entire board provide feedback or complete the evaluation but use a smaller group to deliver and discuss the performance review. Some continuity in the committee composition is good since many evaluation considerations are carried over from year to year. When evaluating a new CEO, some members of the search committee should be included since they know the criteria used in selecting the CEO. Some hospitals include a procedure to gain input from subordinates, physician leaders, and critical medical staff as part of the evaluation process.
Assessment Criteria and Performance Standards
Assessment criteria must be established and communicated before conducting the performance appraisal. Criteria should be determined at the beginning of each year/cycle (calendar year, fiscal year, or employment anniversary). The CEO must be included in determining the assessment criteria, and the board and CEO should agree to them in writing. Some performance categories to consider include the following:
- Vision and the ability to share it.
- Board relations.
- Strategy development and execution.
- Performance on corporate objectives.
- Relationships with various internal and external stakeholders.
- Allocation of financial, physical, and human resources.
Successful performance appraisal systems use criteria that have these characteristics:
- Are observable and behavior-based.
- Can be measured.
- Relate to the job and strategic plan.
- Can be controlled by the CEO.
- Are practical.
- Are not ambiguous.
- Are simple.
The Evaluation Process
The board may find it helpful to use a document to evaluate the CEO’s performance; a straightforward CEO evaluation process includes:
- Assign Responsibility: Decide whether the full board will administer the CEO evaluation or if a committee or task force will implement it. Identify a point person to lead the process and the communication around it.
- Develop the questionnaire and mechanism: Use mutually agreed-upon criteria by the board and CEO (the criteria should never be a surprise to the CEO) and identify how the criteria will be distributed in a secure and confidential manner.
- Determine how criteria will be measured and weighted. The board should include responsibilities from the CEO’s job description and specific organizational goals.
- CEO Self-Assessment: The CEO should perform a self-assessment, rating themself against the same criteria used by the board.
- Summary Report: Compile the results of board ratings into a comprehensive report for board discussion (or discussion by the assigned committee or task force).
- Board or Committee Review: Board members (or the assigned committee or task force) meet to decide what to emphasize in their feedback to the CEO and discuss the final report.
- CEO Feedback: The board chair (and other identified board members) finalizes the CEO feedback report and meets personally with the CEO to discuss the results. This in-person meeting should focus on performance-improvement feedback to the CEO and engage in a productive two-way dialogue with the CEO.
The board chair or the committee designated should review the evaluation appraisal with the CEO, allowing the CEO to comment and include self-assessment data. In those areas where performance still needs to meet the standards, suggestions for improvement should be developed jointly and reviewed at set future intervals. The board should receive a report that includes:
- The special or unique strengths the CEO has demonstrated.
- The areas in which improvement is indicated.
- The management and/or organizational development activities that should be carried out in the future.
The formal evaluation discussion with the entire board should occur in an executive session. Additional dialogue and discussion around the following questions may help understand the CEO’s perspective and move the organization forward:
- What is your assessment of the past year, both successes and things that didn’t go well?
- What is the hospital’s most significant achievement for the year?
- What difficulties were encountered?
- What aspects of being the hospital CEO are most exciting and rewarding?
- What aspects are most challenging?
- What do you, as the CEO, need from the board to ensure further success?
Maintaining the confidentiality of specific feedback; leaks can exacerbate problems and jeopardize individual relationships. Board members should avoid focusing too much on a single issue and provide a balanced review. In addition, board members should remember the motivating power of praise and the debilitating impact of too much criticism. The CEO’s feedback and comments should be noted. The CEO should develop an action plan based on the discussion results and obtain the executive committee’s approval. The plan becomes part of next year’s evaluation process, and the full board should be aware of the action plan.
It is common for the board to send a letter to the CEO confirming the discussions and summarizing the comments. This letter becomes part of the CEO’s personnel file, so the essence of the conversation – including any areas of profound dissatisfaction – must be recorded accurately. The board is responsible for communicating effectively, frequently, and candidly with the CEO, and the CEO is responsible for listening, taking action, and making changes.
Performance Improvement
CEO evaluations stand as a cornerstone for organizational success and sustainable performance improvement. By systematically evaluating the CEO’s performance, the board ensures alignment with strategic objectives and fosters a culture of accountability and trust between the board and CEO. These evaluations serve as a vital tool for boards to gauge leadership effectiveness, identify areas for development, and ultimately enhance overall corporate governance. As the driving force behind a company’s vision and mission, CEOs play a pivotal role in shaping its trajectory. Regular and comprehensive evaluations empower organizations to make informed decisions, maximize leadership potential, and maintain a competitive edge in today’s dynamic health care landscape.