Evaluating and monitoring CEO performance: evidence from US compensation committee reports

Abstract

Purpose

Concerns for improving governance have focused attention on the role of boards of directors in evaluating the performance of the CEOs. There have been numerous discussions about how performance and strategic management systems aid in the evaluation and implementation of strategy and improve corporate performance. However, the value of those systems to boards of directors has not been extensively discussed. The purpose of this article is to describe the use of non‐financial metrics for CEO performance evaluations and offer specific guidance as to how boards of directors can design a performance measurement system that provides a sound basis for evaluating CEO performance.

Design/methodology/approach

The sample for this study was drawn from Fortune magazine's America's Most Admired Companies industry list. Compensation committee reports found in 59 proxy statements were examined.

Findings

Although there are a growing number of companies using non‐financial metrics, results confirm that CEOs are primarily evaluated on financial criteria, indicating a narrow definition of corporate performance. Few attempts are made to ascertain and disclose the appropriateness of the performance measures and to demonstrate how these measures are consistent with the company's vision, mission, and strategies for long‐term performance success.

Originality/value

While some surveys have investigated the growing trend of using non‐financial criteria, in this survey, these criteria are examined in the context of a multidimensional performance evaluation system. Also, a framework for improving the measurement and performance of CEOs is presented. This is an important part of an overall program that should be in place to improve overall corporate governance.

Citation

Epstein, M.J. and Roy, M. (2005), "Evaluating and monitoring CEO performance: evidence from US compensation committee reports", Corporate Governance, Vol. 5 No. 4, pp. 75-87. https://doi.org/10.1108/14720700510616604