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Making CEO Compensation Decisions Easier for Board Members

We are well into the first quarter of the year. As a board, have you done your CEO’s performance review and set up 2018 performance expectations for him/her, and therefore your organization? 

If your board of directors is like many others that I have worked with, this is not a “fun” time of year. It’s hard to agree on exactly how the CEO did. Have you heard any of the following in your board room? 

“I know he/she achieved the goals that were set up at the beginning of last year, but were the goals too easy?” 

“Wow, look at that pay increase or bonus amount! That’s a lot of money!!! Should we really be giving him/her that much money?” 

“That’s more money than I made all year!” 

“I know he/she met most of the goals, but was there anything that happened so we can downgrade his/her performance review?” 

“We didn’t match or beat our peers on all of the financial metrics, so should we decrease the amount of the increase or bonus even though we met the goals of our strategic plan?” 

“We need to do this better next time.” 

“Can we table this until the next meeting?” 

If you recognized any of these remarks from your board room, you are not alone. Even the most sophisticated boards struggle in this area. Why? Is it really that hard to set goals and to evaluate the CEO’s performance compared to those goals? It shouldn’t be. However, you do have to have the following things in place to even have a chance of not having that annual aggravating discussion.  

1)    Trust. It sounds simple, and you may say “Of course we trust our CEO”. If you do, then why do you question the validity of the reasonable goals that he/she is setting and you are essentially approving in the goal-setting process and in the budget? There must be something that is causing you to question the goals after the fact. 

2)    A Formalized CEO Compensation Philosophy. It is important to get all of your board members on the same page in terms of how you will compensate your CEO and how you will evaluate his/her performance. The best way to do that is to have a discussion and then write out a formal compensation philosophy that explains where you want to pay your CEO compared to market, who your market is, and how base pay adjustments will be determined. The philosophy would also include the process for setting up variable pay or incentive pay, and again, where that target is compared to the market. 

3)    Reflection of Your Strategic Plan. The goals and performance expectations that you set up for your CEO should reflect your strategic plan. You, as a board, and the executive team have worked hard to develop the strategic direction of the organization. Use that hard work that you have already done to help you develop the CEO performance expectations for the year. 

4)    Clear communication. Clearly communicate your performance expectations to the CEO and do it in a timely manner. And don’t wait until his/her performance review time to question the goals that you set at the beginning of the year. Talk about your concerns as soon as you have them. Your job, as board members, is to monitor the CEO’s performance, which does not mean just once a year. 

5)    No mixed messages. If the organization had a good year and you are happy with the results, ensure that your review of the CEO’s performance reflects that. Feeling like the board is struggling with the amount of a raise or incentive bonus, or setting up the goals for the next year can make the CEO feel like the board is less than happy. 

Doing a little work on the front end by setting clear performance expectations should help make the performance evaluation process smoother at the end of the year.