Governance expert John Carver was famous for saying “organizational performance is synonymous with chief executive performance.” In other words, if an organization is performing well, the CEO must be good. And if an organization is performing poorly, it is the CEO’s responsibility.
This may be true in for-profits, where the buck stops with only the CEO, but in the social sector, this connection isn’t quite as clear. Social sector organizations exist in increasingly complicated environments with governance by a board and CEO. Organizations also have to maintain a tough balancing act between expectations and reality.
However, our team has found that a highly effective CEO (or executive director, as is the case for many nonprofits) is a crucial component of a nonprofit’s success. This success must be supported by a highly effective board that provides consistent direction and oversight. One of the most common ways to achieve CEO-board alignment is through regular performance reviews and an annual performance assessment. Interestingly, a recent Korn/Ferry report showed that almost 70 percent of for-profit companies have a formal review process in place. In our experience, even though most board members have corporate backgrounds, only 1 in 4 nonprofits have a formal review process. And even for those that have a process, it is often imperfect – with only the board giving input into CEO performance.
In order for strong governance to happen, CEO performance reviews should be commonplace and a way for the organization to focus on alignment and continuous improvement. While CEO performance reviews are critical, your organization should customize the process based on where your organization is in the nonprofit lifecycle and available resources. Here are some tips to make the process as painless and productive as possible.
Before you begin, we recommend that the Board Chair and Governance Committee set a performance review policy. This policy should define how often informal and formal reviews of the CEO take place and by whom, so that that the CEO has a clear understanding of the process by which they will be assessed. Ideally, this policy should be set well in advance of the CEO’s annual review. Keep in mind that the review process shouldn’t be a one-and-done. In order for nonprofits to truly benefit from the process, we recommend that the process be ongoing. When determining how often reviews should take place, consider several informal reviews throughout the year in addition to the formal annual performance review. The annual performance review should be scheduled at a time that makes sense for the organization. Because CEO performance is so closely tied to the organization, it might work well to connect it with the annual retreat or the organization review. For more informal reviews, we recommend meetings at least quarterly. These could include Board Chair check-ins with the CEO and Executive Sessions (board-only sessions) to discuss the board’s work together, its work with the CEO and what the community is sharing about the work. Regardless of how you conduct these informal reviews, they should be based on clear goals and action plans (built from the strategic plan) and connected directly to the job description and professional development plans.
We also recommend that the CEO and Board Chair together set performance objectives well ahead of the formal annual review. This allows the CEO to give their input into what matters most within the agency. There are many different possibilities for these performance objectives, so the best place to start is with: 1) the job description, 2) the strategic plan, 3) previous performance reviews and 4) previous work to determine key skill sets needed for the job. If you have an HR lead, this individual can help tie this process to the organization’s process for consistency.
We strongly recommend a process that collects input from multiple sources and assesses performance on multiple dimensions. We have many clients who have previously erred in using board feedback alone as the source for performance assessment. Some possibilities are: 1) CEO self-assessment; 2) annual organization review, based on strategic plan dashboard (focused on results and metrics in strategy, culture, operations, revenue); 3) salary surveys citing average salaries for CEO in community or issue area; 4) 360-review from board and key staff (focused on skills in leadership, decision-making and people management); and 5) data collected either formally or informally from key customers (focused on results and skills in customer service and collaboration skills). Be aware that there are advantages and disadvantages to all of the approaches above, so take steps to ensure you have a process that is balanced and doesn’t prioritize one data set over another. We also highly encourage boards to go outside formal settings and visit programs and donor sessions. Fortune 500 companies, such as GE and Home Depot, find real value in this type of informal connection with the work being done.
When the review policy, performance objectives and sources for assessment have been identified and/or defined, then you can plan the formal annual performance review. The board should have a small task force (which can be the Executive or Governance Committee) to manage the assessment process and review compensation in the annual review. The CEO or Board Chair should follow the policy and the previously agreed-upon assessment process. Once the process is complete, there should be a final report presented to the entire board for discussion. Then, the board should designate 1-2 individuals to relay the information to the CEO in a well-executed discussion. We highly encourage a few things in this discussion: 1) position it as a conversation about the organization and not just about the person; 2) be constructive and solution-focused; and 3) base the discussion in reality, with deference given to resources available and current environmental trends. Once this discussion happens, the report needs to be updated with mutually agreed-upon goals, needs and actions expected, including recommended compensation. The report should also include a CEO response, in which they can respond to the board in writing. This report must be filed in the CEO’s personnel file.
Finally, the board and CEO must assess the process each year and update the policy accordingly. We also encourage tying this effort to the board assessment, when the CEO, key staff and the board itself evaluate the board’s effectiveness, individually and collectively. This allows for a full 360 assessment – where the CEO can also share how the board is doing in helping the organization meet its goals.
If this CEO performance review process is followed and shaped by individual organizational needs and abilities, it can be a valuable way to ensure 1) board-CEO alignment, 2) celebration of well-deserved praise, 3) unearthing of any challenges before they become more serious issues, and 4) activation of organizational plans and professional development to support going to the next level.
We would love to hear about your experience with CEO reviews and what you have learned along the way.