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CEO Evaluation: Which criteria and dimensions really matters?
CEO evaluation is one of the board’s most important responsibilities, but the definition of objectives, methods and criteria, as well as the evaluation of the CEO’s performance and feedback, are often ad hoc and superficial. As we point out in our CEO Evaluation Guide, companies should first take a close look at the process, the objectives of the CEO evaluation and the use of methods before setting out to define dimensions and evaluation criteria. This approach offers the greatest potential for increasing the effectiveness of CEO evaluations. Failure to take a holistic view of CEO evaluation often leads to frustration and conflict within the board and with the CEO, which can erode trust over time. The risk of biased and inaccurate assessments of CEO performance increases significantly and can lead to serious mistakes. An effective CEO evaluation, on the other hand, not only reduces the risk of negative financial consequences due to inadequate CEO performance, but can also be used as a starting point for CEO development. As a result, shareholders today expect more from a CEO evaluation than just a set of criteria. It is increasingly about creating a virtuous circle of CEO Evaluation – CEO Development – CEO Evaluation to unleash the full potential of leadership. Leading companies are also succeeding in using CEO evaluation as a catalyst for broad cultural change in the organization, as our Microsoft case shows.
Leading indicators for a more effective CEO Evaluation
While we take the weather forecast into account in our actions, the evaluation of CEO performance is still primarily based on downstream indicators such as financial results or operational metrics. Effective CEO evaluation, on the other hand, uses leading indicators to assess CEO performance from more than a retrospective perspective. Evaluation criteria should be defined and collected in such a way that the results can be objectified and used for Peer Review and/or Benchmarking. Many companies still overestimate the results of the CEO evaluation and underestimate the potential of peer reviews and benchmarking to correctly assess and classify the results of the CEO evaluation. We recommend that the evaluation criteria and dimensions of the CEO evaluation be reviewed at least every 3-5 years and consistently adapted to the objectives of the CEO evaluation as well as to the strategy and situation of the company. It is best to define 4-5 dimensions for the CEO evaluation and 3-5 objective evaluation criteria for each dimension that can be directly derived from the objectives of the CEO evaluation and fit the strategy and situation of the company. Through our work with boards and CEOs of globally recognized organizations, we have a deep insight into current trends in CEO evaluation criteria and dimensions. We have chosen to summarize the most common evaluation criteria in 5 dimensions: Leadership, Strategy, People Management, Relationship with External Stakeholders, and Financial & Operational Metrics.
Criteria for leadership and relationships with external stakeholders
Leadership
The impact of a CEO’s leadership on an organization has increased dramatically over the past decade. Regardless of how we describe this phenomenon, whether “tone from the top” or “leadership shadow,” the behavior of CEOs shapes corporate culture and is therefore a critical factor in the sustainable performance of companies. What CEOs say, how they act, what priorities they set, and how they measure performance should therefore be an integral part of any effective CEO evaluation.
Ethics and compliance:
- Integrity ratings: Results of employee, customer, and partner surveys on perceived CEO integrity.
- Compliance rate: The number and severity of violations of laws and internal policies indicate the extent to which the organization believes that adherence to ethical guidelines and standards is a high priority for the CEO.
- Diversity and inclusion: Having concrete numbers on workforce and leadership diversity, how these goals are tracked, and whether they are met is an indicator of the importance CEOs place on an inclusive culture.
Employee satisfaction:
- Employee Net Promoter Score: a specific KPI that measures how likely employees are to recommend the company as an employer. The change reflects the evolution of the company’s attractiveness to employees and external talent, and provides insight into how sustainably the company is currently managed.
- Employee Satisfaction Index: Through regular employee surveys on satisfaction, commitment and motivation. The development of this satisfaction is an indicator of the management’s ability to reach out to employees and take them along on the journey. A sustained negative trend almost always leads to the failure of a strategy.
Effectiveness & Resilience:
- Leadership Effectiveness Index: An aggregated score made up of several assessment dimensions such as vision, inspiration, delegation, communication skills, and decision making. It can be measured through regular assessments or specific leadership assessments.
- Digital data analysis of communication patterns and decision-making processes provide valid indicators of the quality of decision-making processes and the resilience of a CEO.
- Evaluations of case study processing, simulations, and scenario planning provide powerful indicators of the quality of strategic decision-making, crisis management, and innovation. In addition, case studies can be an important cornerstone of effective CEO development plans by examining the successes and failures of other companies.
The relationship with external stakeholders
One of the most important roles of the CEO today is to effectively connect and inspire the company’s internal and external stakeholders. Investors, customers, employees and partners expect the CEO to “look ahead” and create space for opportunity. The quality with which CEOs manage complex stakeholder constellations and connect worlds without paralyzing the company is critical to its performance.
Clients:
- Customer Satisfaction: Net Promoter Score (NPS)
Investors:
- Investor Relations Ratings: Ratings from financial analysts and investors enable the CEO to better understand and align with the interests of investors.
Regulators and Policy:
- Regulatory Engagement Score: Evaluates the quality and effectiveness of interactions with regulators, including frequency, response time, and regulator satisfaction with information provided.
- Risk Exposure Index: Assesses the risk posed by changes in the political and regulatory environment and how well the company is prepared for them.
Partnerships:
- The number and quality of new partnerships: The ability to form new and deeper partnerships enables companies to gain competitive advantage. This can be an indication of how innovative and open an organization is, and how external market participants perceive the quality of the organization to generate financial benefits.
- Partnership Objectives Fulfillment: Measures the extent to which the goals set at the beginning of the partnership have been achieved. This allows conclusions to be drawn about how effectively the partnership is being managed.
- Joint venture targets: Measures the results of the partnership against the goals set. By analyzing how effectively joint ventures are managed, conclusions can be drawn about the success of M&A integrations.
Society:
- Brand Perception Index: Measures the public’s perception and image of a brand. The change in brand perception is one of the most important leading indicators in many industries and allows conclusions to be drawn about the influence of the CEO on brand perception and thus on future business opportunities.
- NGO Rating: NGO ratings enable the CEO to better understand the interests of critical civil society and activists and to incorporate them into his communication and actions. At the same time, the inclusion of NGOs significantly reduces critical press coverage.
Criteria for strategy and strategy execution
Strategy
The core task of developing and executing strategy is one of the most important skills of a CEO. Although CEOs often rate their skills in this dimension very highly, we see time and again that many strategies are ad hoc or tactical in nature. Strategy execution performance is almost always inadequately considered in CEO evaluations, and often not considered at all. Given that strategy execution often falls short of expectations, this GAP often leads to distorted results of CEO performance, which can have serious consequences.
Strategy Development:
- Strategic Benchmarking: Benchmarking assesses the extent to which a company’s goals and strategies differ from those of its competitors and is an indicator of strategy quality and the ability to achieve sustainable competitive advantage.
- Risk Assessment: Proactive identification and management of risks builds resilience and is an indicator of prudence, proactivity and the ability to think and plan in scenarios.
- Innovation rate: The introduction of new products, services or the level of investment in research and development, measured by the number of patent applications or the share of new products in sales. The indicator allows conclusions to be drawn about the number of innovations and their effectiveness.
- Change in market share: The change in market share is an indicator of the effectiveness of the strategic focus. It is a very limited indicator and must be considered in conjunction with indicators of financial and operational performance and when benchmarked against competitors.
Companies that are able to not only define strategy, but also execute it successfully and dynamically align resources – including money, talent, and management – with the evolving corporate strategy deliver, on average, twice the return to shareholders. The benefits of proactive CEOs are not limited to strategy execution and resource allocation. CEOs who score well on these dimensions are often more prudent and courageous, which has a positive impact on dimensions such as leadership, external stakeholders, and employee management.
Strategy Execution GAP:
- Success rate of change initiatives: A CEO’s ability to effectively manage and implement change is a powerful measure of the company’s future adaptability. The indicator is a valid measure of the extent to which the CEO’s leadership drives the overall success of the company.
- Progress Rate on Strategic Initiatives: Measures the progress of strategic initiatives against plan. A high correlation between planned and actual progress indicates successful closing of the strategy execution gap.
- Achievement of strategic milestones: This indicator accurately measures the extent and time frame in which defined strategic objectives are being achieved. Its use is particularly recommended when expanding into new markets or launching new products, as it provides a clear but limited picture of execution capability.
- Execution Efficiency: Assessment of the time and resources required to implement strategic initiatives compared to the original plan. This KPI can provide information on how effectively and efficiently the CEO and his team are executing the strategy.
Dynamic Resource Allocation:
- Resource Allocation Flexibility Index: Measures the ability to move resources quickly between projects or strategic areas. Companies that can move resources effectively and quickly achieve twice the return on investment as companies that move resources slowly.
- Return on Investment (ROI) Assessment: Analyze the effectiveness and efficiency of resource allocation across strategic investment areas. Understand how well it responds to changing market conditions by reallocating resources quickly and effectively.
Strategic Consistency & Resilience:
- Coherence: Assessment of the consistency between short-term actions and long-term strategic goals. This can be captured through regular reviews and provides information on the consistency, flexibility and resilience of the overall strategy.
- Organizational Alignment: The extent to which different departments and teams are aligned to common strategic goals. This can be assessed by analyzing departmental objectives and their contribution to the overall strategy.
- Strategic clarity and communication: Assess the extent to which employees at all levels understand the organization’s strategy and how they relate their own work to the strategy. This can be measured through regular surveys or assessments.
Criteria for employee management and key financial performance indicators
Team leadership and Employee management
A CEO’s leadership has a direct impact on a company’s ability to innovate, efficiency, and financial strength. This key evaluation criterion provides insight into how a CEO shapes corporate culture, increases the overall effectiveness of the organization, and guides the company through challenging times.
Team Leadership:
- Executive Team Dynamics: The dynamics within the executive committee provide information on how effectively the CEO communicates with the executive committee, influences strategic decisions and promotes consensus solutions. Possible KPIs include 360-degree feedback from the board, CEO influence on strategic decisions, and effectiveness of board decision implementation.
- Executive Leadership team resilience: The ability of the management team, under the direct leadership of the CEO, to respond effectively to setbacks and recover from challenges is a proven indicator of how the CEO’s performance changes in challenging situations and crises. Resilient leadership is often a reflection of the CEO’s strategic, communication, and empathy skills, which are critical to guiding the organization through difficult times.
Employee leadership:
- Employee Feedback Rate: The percentage of direct reports who regularly give and receive feedback. This KPI reflects how actively the CEO promotes a culture of appreciation and open exchange.
- Conflict resolution skills: Measured by the number of successfully resolved conflicts within the executive committee or directly reporting teams. This can be measured through self-reporting or feedback from team members.
Financial results and key operating figures
Financial results and operating metrics are critical to assessing the economic stability and performance of a company. As important lagging indicators, they also serve as a basis for CEO compensation. We recommend that these metrics be evaluated against the peer group and that it be clearly defined which position within the peer group represents which level of target achievement.
Financial results:
- Total Shareholder Return (TSR): This metric is critical and should always be compared to the peer group to assess how sustainable the company is in creating value. It indicates whether the CEO is able to create long-term value for shareholders. It is also an important indicator of the company’s strategic direction and operational efficiency.
- Return on Equity (ROE): This ratio, which measures net income in relation to shareholders’ equity, is essential for assessing a company’s profitability and efficiency and allows for industry comparisons.
Operational Metrics:
- Customer Lifetime Value (CLV): This metric calculates the total value generated by a customer over the course of his or her relationship with the company. It is a key indicator of a company’s ability to capture the full value of its customer relationships and can be used to gauge the effectiveness of a CEO’s strategy.
- Productivity per employee: This ratio measures the efficiency with which resources are used to generate revenue. An improvement in this ratio indicates effective process optimization and strong operational management. It provides an indication of how effectively the CEO is managing day-to-day operations to minimize costs and maximize operational performance.
- Quality indicators: Depending on the industry, these can be return rates, production defect rates, or service level agreement (SLA) compliance. These metrics directly reflect operational efficiency and product or service quality and can have a significant impact on financial performance
Objectivity is the key to the evaluation of the CEO
CEO evaluation is one of the most challenging tasks for a board of directors. Many CEO evaluations are still based on subjective assessments. Purely subjective assessments of management behavior, resource allocation, strategic progress, corporate culture, and relationships with external stakeholders run the risk of significantly damaging the relationship of trust between the board and the CEO. To ensure greater objectivity, it is advisable to involve external service providers. They can help define evaluation dimensions and criteria that are unbiased and whose results can be objectified through peer reviews and benchmarking. The use of benchmarking and peer reviews in particular is becoming increasingly important in CEO evaluation. The relativization of leadership and decision-making qualities in the context of the peer group is crucial to increase the significance of the evaluation. Our experience shows that internal evaluations often fail due to limitations in data availability and quality. In addition to an objective and neutral assessment, an external service provider can act as a neutral party who effectively communicates the results to the CEO. In our experience, this is a key factor in ensuring that the feedback is received and acted upon constructively.
