We know that retention of a good Chief Executive (CEO) is one of the major risks faced by organisations in a world where there is strong competition for talent. By David Hammond, Head of Tribe Leadership Executive Search.
The reality for your organisation is that you probably can’t remunerate your CEO to the level of other organisations.
The development of KPIs is critical to retaining a CEO, but also to the performance of the organisation to prevent unclear priorities and strategic drift.
‘What’ is being measured is critical because that which is measured is tracked more closely. The ‘how’ an appraisal is done is also critical to the motivation of the CEO. Conducting a performance appraisal should be consistent with the values of the organisation in the way people (including Board members) are expected to treat one another.
Doing good sets of KPIs is actually really hard, and I have a lot of sympathy for Boards. It is also hard to know where to get some help. I get confidential calls from CEOs around this time of year asking me to work with their Boards who are struggling with the KPIs.
A memorable call was from a CEO whose Board had called in an expert to redo the CEO’s KPIs without their input.
“Help,” he said, “can you review this and let me know if you think I’m off in telling my Board that these KPIs are unreasonable?”
I looked over the KPIs and sighed.
I think you probably would need a PhD to interpret them. I did some work to simplify them but keep the intent. The CEO was much relieved, but the Board dug their heals in and soon after lost a very good CEO. All CEOs can relate in some way to this and have stories about their own KPIs. As a CEO, I remember getting 18 KPIs one year. I counted them. It is hard to work out the priorities in this sort of situation.
In KPI work that our Tribe Leadership does with different Boards and CEOs – the key questions we ask are: “What are you telling the CEO that success looks like by the way you do their KPIs” and “are you really showing them the type of organisation you want the CEO to build with your KPIs?”
We have developed two forms of CEO KPIs that often depend on the maturity of the person – one set we call ‘Functional KPIs’ and the other is called, ‘Strategic KPIs’.
Functional KPIs
These KPIs are when the Board wants to focus on monitoring the management performance of the organisation more closely across a small set of functional areas critical to that organisation (finance, work programme, staff engagement etc).
They are heavy on managerial KPIs and lighter on strategic KPIs. A Board may use this approach when they want more structure around the CEO.
Maybe the Chief Executive is new to that level, or maybe the Board feel that the CEO is losing sight of the basics.
However, often Boards take this approach because they believe that their governance role in ‘monitoring performance’ is best done this way. While this may feel like governance doing its job better, it does not necessarily lead to better outcomes.
It teaches a CEO that ‘success’ means to focus on detail more than strategic outcomes. That is an error.
Strategic KPIs
A second alternative developed by our Tribe Leadership is more strategic outcomes-focussed KPIs, but with a small core of management-focussed KPIs (like the finances and staff engagement).
This set of KPIs is for the CEO who is consistently delivering on the ‘hygiene’ of the organisation, and the Board wants them to now raise their eyes and focus strategically. A common mistake is for a Board to try to capture all of the Strategic Plan in the CEO KPIs. We help a Board to take a helicopter above the organisation’s plans to ask key questions like, “What do you really want to achieve from this organisation?” and, “How do you want it to be fit-for-future?”
While you may want to match the KPIs to the Long-Term Plan, this approach is a straight-jacket and a road to over-complicating CEO KPIs where the CEO will need a PhD to interpret them.
A mistake that Boards can make is when they naturally choose a ‘Functional KPI’ approach when the CEO is new but fail to adapt that into a ‘Strategic KPI’ approach once the CEO has developed the core management (hygiene) skills. The approach to KPIs should shift from Functional to Strategic over time with the development of the CEO.
What I’m saying is – your People & Culture Committee on your Board that oversees the CEO KPIs may need some support with this. The approach to setting the KPIs should evolve and not stay static.