OUR BLOG

MEASURING THE CEO PERFORMANCE

• 28th June 2021

CEOs of large corporations are known to go through an annual evaluation for their performance, after a precise process. Startup CEOs are not different in that respect. I would venture to say that assessing how a CEO performs is more capital in a startup than in a long-established organization where the structure brings an inertia akin to that of a big vessel whose route cannot be altered as quickly as that of a small skiff. Whether the CEO is the founder or not does not alter the perspective. The two qualities are distinct.

1. Why Measuring the CEO Performance?

a. To enhance the future of the startup
This is the ultimate goal. The better the CEO performs, the farther the company will go. To achieve this level, performance is not only a simple quantitative metrics but a combination of qualitative and quantitative aspects.

b. To improve on results and not to penalize
The best outcome of a good CEO performance review is to enhance the achievements of the CEO as a leader. The consideration for an alternate CEO is rarely in the interest of the business, unless the potential damage in keeping the person in place is unrepairable. Bringing in a new leader is a disruptive event in any company, more so in small, tight, entities.

c. To set the variable part of the compensation to the CEO
In most startup the salary component of a CEO’s compensation is only one basic part of it. The level of incentives granted in the form of capital instruments, such as stock, stock option etc., depend upon the perceived performance of the executive. Hence it is a process that requires rigor and time.

d. To foster a successful leadership culture
The goal is to improve employee retention and performance, enable employees to become creative and accountable and multiply exchanges between each group, making the corporation a whole and not a sum of silos.

2. How Often Does This Evaluation Occur?

Generally, once a year unless there is a necessary post-recommendation review (3 months later). Some, rare, startups have a higher frequency of assessment, because of the pace of change.

3. Who is Qualified To Do The Evaluation?

The Compensation Committee of the Board. In the absence of such committee, the chairman, if different than the CEO, and the independent board member(s).

Independent directors are the best qualified to conduct such evaluation. Ideally, information is collected directly through one or more interviews with the CEO and some conversations with employees reporting to the CEO. Once information is gathered, formatted and shared with the CEO and all board members a discussion with the CEO must lead to agreeing on which points the CEO has an outstanding score and on which areas some improvement could be envisaged, and what could be done to deliver the improvement. It is a discussion platform; therefore, the CEO may disagree on aspects of the assessment and bring some relevant explanation that changes the assessors” viewpoint.

Once a final understanding is reached, board members generally offer their advice by sharing their experience taken from similar cases.

4. How is it Measured?

Some goals are generic and common in all startups, others, more specific, depend on the business field and the development stage of the venture.

1. Generic goals:
   1. To execute on the vision: one of the prime responsibilities of a CEO is to embrace and communicate the vision, mission, and the corporate values to all stakeholders.
   2. To build and maintain an engaged team: acquiring talent, motivating employees and transmitting enthusiasm for the purpose of the venture are traits found in admirable CEOs. This is how a company culture shapes up.
   3. To watch over the resources and be the steward of all assets, intellectual assets as well as fixed assets and funds entrusted by investors.
   4. To improve on competitive position: both the product/service offering and the reputation of the firm vis-à-vis its peers must knock them out.
   5. To reach or exceed revenue growth milestone with marquis customers: among startups, ramping up revenue quickly with visible, first-class customers is a must. It is the only path to success.
   6. To achieve financial milestones (EBITDA...). If goals specified in (iii) and (v) are reached, this goal is thus inevitably achieved.
       
2. Specific Goals
   1. Those depending on the stage of development
      • Human resources goals.
      • Product goals.
      • Business development goals.
   2. Those depending on the field of activity
      • Product solution differentiation goals
      • To develop a portfolio of intellectual property that protects the company technology against competitors, predators, and large firms seeking to penetrate a new domain.
      • To open a new market
         
3. Setting expectations right from the start

For fairness with the CEO, and for the good of the company, during the recruitment of a CEO the CEO is told of the general annual process used to evaluate her performance. At the beginning of each year, the board shares with the CEO what areas they want to focus on. Then, at the beginning of the fourth quarter, the detailed process begins. The objective is certainly not to surprise the top executive, but to make sure she understands the expectations she must meet.

5. The Importance of The CEO feedback

In some companies, the CEO first evaluates oneself according to a set of criteria proposed by the evaluator(s). Then a discussion engages to compare differences between the self-assessment and the board assessment of the CEO. In other startups, a reactive approach is adopted, and the CEO responds to the evaluation of her performance as presented by the evaluator(s). The more the discussion goes deep into details, the better for the future of the venture and of the CEO’s management perfection.

6. Potential Flaws

1. Such a system focuses on short term results. In a startup it is fundamental indeed that some decisions with immediate impact be evaluated.
2. Long-term impact decisions are hardly measured. The visibility in the future is blurry at best. Any business is dependent upon external factors, out of the control of management. To anticipate several events and devise alternate strategies to address them is part of managerial expertise. However, one cannot anticipate “black swan” events, totally unexpected and highly disruptive. However, the ability for a CEO to change and adapt to unforeseen circumstances is an attribute praised by all. When the assessment points to the reaction of a CEO in such event, it has de facto become a short-term issue, analyzed a posteriori.

Evaluating the CEO takes time off CEOs operations to concentrate on the past. It is not a waste of time. A good, genuine approach to the evaluation and an open dialogue between the parties make wonders to lead startups to a growing success.