I’m often asked, “How do we evaluate our executive’s performance?”

It’s usually board directors who ask me this. But there are other scenarios as well. For example, the acquirer of a company. Or owners who want to step away from active management.

Sometimes I’m asked for a specific tool or questionnaire that can be used. I don’t have them. They have to be custom-built.

Let me elaborate:

Do your work first: Define success. 

When I’m asked how to evaluate an executive’s performance, I ask my question, ‘What did you want that executive to accomplish?”

For the most part, you evaluate your executive based on whether they met or made progress towards your goals. If those have been well-defined with clear metrics – most of your work is done.

Often the person who asks me the question isn’t sure of what the board’s goals are. Or they know the goals, but upon reflection, the way they are worded is squishy – leaving too much to interpretation.

Here are quick examples of ambiguous goals vs clear and measurable ones:

Financial Performance:

• Ambiguous: “Increase revenue this year.”
• Clear and Measurable: “Achieve a 15% increase in company revenue by the end of the fiscal year compared to the previous year.”

Operational Effectiveness: 

• Ambiguous: “Improve our product delivery system.”
• Clear and Measurable: “Reduce product delivery times by 20% and decrease delivery-related customer complaints by 30% by Q4.”

Staff Related:

• Ambiguous: “Improve employee morale.”
• Clear and Measurable: “Achieve a 90% positive response rate on the annual employee satisfaction survey and reduce staff turnover by 10% in the next 12 months.”

Safety or Quality:

• Ambiguous: “Make our manufacturing processes safer.”
• Clear and Measurable: “Reduce workplace accidents in the manufacturing department by 25% in the next year by implementing a new safety training program and updating safety equipment.”

Market Share:

• Ambiguous: “Grow our market presence in the region.”
• Clear and Measurable: “Increase our market share in the Southeast by 8% by launching two new marketing campaigns targeting key demographics and expanding distribution to 25 additional stores.”

Define your goals. You don’t need too many. Three to five is often fine.

Make them clear and measurable. Then it is dramatically easier for everyone to track progress, ensure alignment within the team, and determine when the goals have been achieved. Which is, in a nutshell, your evaluation.

Purpose of evaluation

Along with knowing what you want the executive to accomplish, you need to know what the evaluation is intended to accomplish. There are two reasons for evaluating executive performance.

Compensation and retention: For executives, compensation is often impacted by performance. This approach works best when:

• The goals being evaluated are clear and measurable (restated for absolute clarity)
• The executive has the resources and/or authority to pursue those performance goals.

In some cases, the data from these evaluations is used to determine whether or not (or in what capacity) to continue the relationship with the executive.

Development: This form of evaluation is focused on supporting and guiding the professional growth of the executive. This can include performance but will also include leadership competencies, skills, and behaviors.

When the goals are development-oriented, they are often a part of a coaching, mentoring, or some other leadership development process.

Whether delivered together or separately is a topic of debate. What I often see is that it is recommended to conduct them separately. This will hopefully increase transparency and take the fear out of a coaching conversation.

In practice, it takes more time and energy to do them separately. Unless you are in a very large organization, it’s the same people involved in both evaluations. So even if they are delivered separately, they may not always truly be separate.

My recommendation: If you have the resources, do them separately. If not, do them together. But either way, do the evaluation. Learn from whatever you do and improve on your process the next time.

Components of evaluation

Both types of evaluations follow the same format: Primary objective, Criteria and metrics, time frame, Feedback, and Outcome.

Compensation-Focused Evaluations:

• Primary Objective: Designed to determine appropriate compensation based on an executive’s performance. The evaluation will typically lead to decisions regarding salary adjustments, bonuses, stock options, and other financial rewards or penalties.
• Criteria and Metrics: Often tied to specific organizational KPIs, financial outcomes, or target achievements. For instance, an executive might be rewarded for meeting sales goals, reducing costs by a certain percentage, or achieving a specific market share.
• Timeframe: Typically conducted annually, in line with the organization’s fiscal year, to determine bonuses or adjustments for the upcoming year.
• Feedback: Usually result-oriented. It focuses on whether the executive achieved the set goals and objectives.
• Outcome: The immediate outcome is usually a monetary decision – an increase or decrease in compensation or the granting of specific financial incentives.

Developmental-Focused Evaluations:

• Primary Objective: The primary aim is the growth and development of the executive. It identifies areas of strength and areas that need improvement or further development.
• Criteria and Metrics: These can include performance metrics, but the focus is on competencies, behaviors, and skills. Feedback might touch upon leadership style, communication skills, strategic thinking, and other soft skills.
• Timeframe: Might happen more frequently than annual compensation reviews. They could be semi-annual or even quarterly, allowing for continuous feedback and adjustment.
• Feedback: Often more qualitative than in compensation-focused evaluations. It might involve peer reviews, 360-degree feedback, and input from subordinates. The idea is to provide a holistic view of the executive’s performance, behavior, and potential areas of growth.
• Outcome: Typically, a set of recommendations for professional development. This could include leadership training, coaching, mentoring, or specific projects aimed at addressing identified gaps or areas for growth.

Conclusion

Now, you can see how a simple question, “How do we evaluate our executive’s performance?” is not so simple to answer.

Hopefully, you can also see that the work it would take to deliver a useful evaluation is the same work that sets the stage for a much more focused and highly performing-organization. If you, as a board director, holding company president, or owner do your job well – you make it easier for your executive to do their job well.

Take good care,

Christian

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