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CEO Review Pitfalls to Avoid

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BY MIKE HIGGINS

As the youngest member of KNG & Co. with “only” 24 years of consulting experience, I have seen my share of good performance evaluation systems and bad evaluation systems.  In this article, I want to share with you a bad evaluation system that was devised by the board of a billion dollar credit union to illustrate four pitfalls to avoid in your CEO evaluation process.

Their plan was fairly simple and I am a fan of simple.  There were basically two elements to the plan.  The first element, weighted at 25%, was a board CEO performance review – the traditional subjective evaluation of CEO performance scored on a 1-5 scale.  The second element, weighted 75%, was based upon financial performance – return on assets (ROA), net worth, asset growth, efficiency and asset quality.

At first glance, the second element, financial performance, looks like a well-balanced set of measures.  It includes the four counter-balancing areas of growth, profit, quality and productivity, plus a capital adequacy (safety and soundness) measure.  The trouble resided in where the performance targets were set and this is a general shortcoming I see in most plans that I am asked to review.

The board and management team developed a very thoughtful and robust three-year strategic plan.  The first year of the strategic plan was reflected in the budget for the upcoming year.  Seeing the connection between the budget and the strategic plan, the board was pleased, and approved the budget.

What happened next is a common mistake boards make.  They developed the performance metrics for the CEO independent of the strategic plan.  The first financial measure, an ROA of 0.70%, was aligned with the budget.  Unfortunately, the net worth, asset growth, efficiency and asset quality measures were not.  They were based upon peer, and the targets represented significant departures from the budget and strategic plan just developed.

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