CEO Self-Assessment: Be True to Yourself (Assessment) | Proskauer – Benefits and Executive Compensation Blog
Report cards may sound like the assessment of college students, not the CEOs of multi-billion dollar companies. But over the past decade, some companies have adopted a CEO “self-assessment” to assess CEO performance. This approach can take a myriad of forms, ranging from an informal discussion with the CEO to the CEO preparing a formal report addressing performance issues.
Consider the following: An Intelligize search performed in May 2022 for publicly filed proxy statements that contain “self-assessment” or “self-assessment” in the three words of “CEO” returns 623 results. While imprecise and anecdotal, this survey of proxy disclosures suggests that some public companies are now incorporating CEO self-assessment as part of their review of CEO performance.
Proxy disclosure of the CEO’s self-assessment process varies by issuer. For example, consider the following disclosures from the 2022 proxy statements for International Business Machines Corporation (“IBM”), McKesson Corporation (“McKesson”), and Akamai Technologies, Inc. (“Akamai”):
- IBM“The chair of the compensation committee works directly with the committee’s compensation consultant to provide a decision-making framework for the committee to use in determining annual incentive payouts. [to the] President and CEO. This framework takes into account the self-assessment of performance by the Chairman and Chief Executive Officer against the commitments for the year, both qualitative and quantitative, and also takes into account progress against strategic objectives, an analysis of IBM’s total performance during the year and the company’s overall incentive score. The committee considers all of this information when developing its recommendations, which are then presented to the independent members of IBM’s Board of Directors for review, discussion and final approval.
- McKesson: As part of the year-end results review, the “CEO presents an assessment of his individual performance results to the Board and discusses his objectives for the new fiscal year.”
- Akamai“With regard to his own compensation, the CEO carries out a self-assessment of the performance of the previous year. The Board (without the participation of the CEO) then discusses and assesses the performance of the Chief Executive Officer. The TL&C [Talent, Leadership & Compensation] The Committee is the ultimate decision maker on the compensation of our CEO and other Named Executive Officers.
The actual components of the CEO self-assessment vary from company to company.
- Some companies may follow a “free-form” approach, which allows the CEO to state what key metrics or objectives he considers relevant and the extent of his achievements. Others provide a set of financial and non-financial goals (such as leadership milestones) that must be achieved.
- In terms of timing, some focus on the most recent fiscal year; others focus on goals that span a longer time frame (such as a three- or five-year budget period) and may include progress on succession issues if the CEO is nearing retirement.
- In line with the current focus on ESG objectives, the CEO can be expected to address progress on environmental and social issues.
- There may be a “catch-all” category, in which the CEO is expected to address “misses” or areas for improvement.
How is the self-assessment used? Frequently for compensation purposes, often as part of the CEO’s assessment of achievement of the non-financial measures underlying the Annual Incentive Plan (“AIP”) and related payouts under the AIP (such as separate strategic and operational objectives of earnings per share (“EPS”) growth, total shareholder return (“TSR”) and other financial metrics). Second, on a more general level, as a ‘reality check’ – the point is that the tone, directness and ‘feel’ of a self-assessment, in many cases a reading ‘between the lines’ , can provide the Council with useful assistance. insight into the CEO’s view of his performance and whether there is a ‘disconnect’ between that view and the company’s current operations and future prospects. The audience for the CEO’s self-assessment is typically the compensation committee (but may include other directors serving on committees that affect the CEO’s performance, a committee of independent directors, or even the whole board). Privilege issues should also be considered when using CEO self-assessments, so legal counsel should be consulted as part of implementing a self-assessment protocol. -Evaluation.
We end with some observations from Mark Nadler, a friend of the firm and the founder of Nadler Advisory Services; Mark (along with his late brother David Nadler) was a pioneer in advising CEOs and boards. Mark cautions against focusing solely on the CEO achieving financial metrics, especially when the company has had a good year. In Mark’s view, financial metrics are “lagging indicators,” so regardless of how well the business performed in any given year, it’s important to focus on the future and see how CEO contributes to next year’s performance and overall performance. future of the company. As part of this “future-oriented” non-financial focus, Mark recommends that the self-assessment consider strategy, talent development, company culture and leadership, all factors that remain important for the long term.