CEO Performance Evaluation Methods

April 11, 2018

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CEO Performance Evaluation Methods

April 11, 2018

 

Question: “My company is looking for a better way to evaluate the performance of our CEO. It seems like “stock value” has been the primary way to do so, at least historically. Is it still the best performance measure of a CEO’s efforts to increase the value of a company?”

 

Answer: It is the “common measure” historically, but far from the “best!” A company’s stock market value is affected by many “psychological factors” that influence stock prices in general. For example, in the “Great Recession” of 2008, did all of the companies that lost 30% or more of their stock value suddenly have CEO’s whose performance levels fell by a similar amount?! Of course not! It was dictated by economic and financial factors beyond their control, and the control of many other entities.

 

Then what can a company do to more closely tie a CEO’s performance and associated rewards for improving the overall value of the company?

 

Fortunately, there are much better measures. Some are more complex in their design, others less so. So, to some extent, the tolerance level of the organization for preparing these incentive plans is a factor in which approach is selected.

 

On the simpler end, there are incentive plans that tie key performance goals to a pre-defined reward for achieving them.

 

On the more complex end, take a look at Economic Value Added Plans, and a closely related idea called Shareholder Value Added Plans. These plans will make a tighter connection between the Executive’s performance and his/her rewards.

 

If you have any related questions, don’t hesitate to contact our office. 

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