CEO PERFORMANCE PLANNING & APPRAISALS

CEO PERFORMANCE PLANNING & APPRAISALS CEO PERFORMANCE PLANNING & APPRAISALS OPPORTUNITY FOR ENHANCED BRIEF DESCRIPTION OF REPORT OR PARTNERSHIP BETWEEN HOSPITAL INSERT BOARDS FROM REPORT AND THEIR HERE CEOS

PREPARED BY James A. Rice, Ph.D. Practice Leader Kate Brecke Consultant www.ihstrategies.com February 2009 w w w.ih S t r at e gies.com 1

As hospital and health system boards explore ways to enhance the performance of their fiduciary duties, they quickly recognize their dependency on their CEO to guide and support their governance work. But how can the board be confident and comfortable that their CEO is performing his/her role effectively? A central vehicle to assure CEO performance excellence is increasingly seen to be a new reliance on modern CEO performance planning and appraisal arrangements. While the business literature has extensive research into best practices for CEO performance management, the US healthcare sector has only recently begun to raise the bar on its study of, and calls for such best practices. To help more boards enhance their CEO performance planning and appraisal programming, we conducted a short web survey in mid-2008. The findings are summarized in this White Paper. In discussing the survey findings with a panel of CEOs, it was informative to have these observations shared: Insights about the need for new Initiatives We have good intentions, but too often are a bit behind schedule. CEO performance goals and measures need to be developed prior to start of fiscal year, but that does not always happen. CEO in East Coast We have a pretty good system, but I think the board looks at my annual performance review like a visit to the dentist. CEO from North Central We review my performance, but do not use the process to really help me think strategically about my career development, and rarely even discuss succession or continuity planning. CEO from West Coast Recession Squeeze and Increased Scrutiny of Executive Performance and Compensation Puts Pressure on Great Leaders Our recent national survey of 125 hospital and health system leaders provides fresh encouragement for boards and CEOs to raise the bar on their future performance management systems. Although this survey is focused on CEOs, it is likely that parallel calls for enhanced leadership review and performance development could apply to the growing number of physician leaders and other senior executive officers. w w w. IH S trategies.com 2

The recession is exploding demands on hospitals to deliver better value for money, and pressures are growing for more transparency and accountability from hospital boards and senior executives. All these forces interact to create a need for enhanced leadership within the board, physician collaborations, and executive ranks. The prospects for enhanced leadership improve when the leaders are more structured and formal in their approach to the annual CEO performance review process. CEO-Board Partnership is Essential to Enhanced Performance Most organizations are conducting CEO performance appraisals (98%), and most do so at the end of their fiscal year (45% versus calendar year of 15%) or in conjunction with other compensation decisions (35%). A majority of the boards ask the CEO to submit a selfassessment (98%), and then seek input from these sources*: Exhibit 1 Entire Board 69% Officers of Board 46% CEO Direct Reports 22% Physician Leaders 18% Other Boards or Leaders 18% *Could respond to more than one source of input The Board Chairperson is most often tasked to discuss the results with the CEO (60%) or via a standing committee (30%). Very few deliver the review via the entire board (5%). Interviews with selected CEOs suggest the discussion with smaller groups can be the most useful and personal. w w w. IH S trategies.com 3

Alignment of Review Criteria to Organization s Objectives While most CEO performance reviews are focused around a discrete event (year-end) (86%), 31% are attempting to establish a culture where the experience occurs over a more extended period throughout the performance period. The criteria used in the review process vary, but most often are aligned to the overall objectives of the organization (82% are 1 or 2 on a 6-point scale in exhibit 2). Of significant note is the 6% to 18% who find very little or only moderate alignment of the CEO s review to objectives of the organization. Exhibit 2 Strength of Alignment Frequency of Alignment Strongly Aligned Performance Criteria to Organization s Performance Objectives (1) 51% (2) 31% Moderately Aligned Performance Criteria (3) 12% (4) 4% (5) 2% Unaligned Performance Criteria (6) 0% Career and Succession Planning Of the various components used in CEO performance management processes, the weakest is provision for planning for career development of the CEO (35% in exhibit 3). With a growing number of the nation s hospitals and health systems moving in the 59-65 age cohort, boards would be well advised to focus greater attention on how to use the performance review process, not just for career planning, but for succession and continuity planning. w w w. IH S trategies.com 4

Exhibit 3 Frequency Components Included Annual performance evaluation, including written and verbal feedback 91% Performance appraisal results influence merit increases and bonus comp 82% CEO self-appraisal 78% Balance of quantitative and qualitative goals with appropriate metrics 72% Written document outlining clear CEO goals and achievement metrics 69% Regular CEO progress reviews throughout evaluation period 42% Provision for planning for career development of the CEO 35% Criteria for CEO Performance Appraisal Ten criteria were measured for importance in assessing the CEO, with financial results scoring the highest at 5.83 on a 6-point scale where 6 is important and 1 is unimportant (exhibit 4). In the current environment we are likely to see Quality increase, but not to the point of surpassing Financial Results and Strategic Vision. Exhibit 4 Criteria Importance of Criteria Financial Results 5.83 Strategic Vision 5.75 Quality Scores 5.73 Board Relations 5.71 Physician Relations 5.68 Decision-Making 5.65 Patient Satisfaction 5.65 Communications 5.59 Employee Satisfaction 5.45 External Relations 5.40 w w w. IH S trategies.com 5

From Appraisal to Appreciation and Planning Following this web survey, we convened board, CEO and HR leaders to begin a dialogue on next generation appraisals. The consensus was that the challenge was less an issue of improving the review, and more a challenge of moving the focus from retrospective assessment to prospective planning and support for the CEO s performance. High performing CEOs would welcome more intelligent conversations about board expectations for performance metrics and links to incentive compensation, and that these expectations should: be articulated before the performance period begins; recognize opportunities for CEO career planning and growth; lead to one to two mid-year conversations with the Board Chairperson about progress to plan; link to meaningful board investments to support CEO performance enhancement (networking with other high performing CEOs, mentoring opportunities, access to executive coaching, and even short sabbaticals to acquire or refine targeted skills and competencies away from the office); and assure that more modern incentive compensation arrangements linked to significant and strategic advances by the hospital or health care system. As the industry moves into the economic challenges of a national economic recession and increased executive scrutiny, boards and CEOs will need to carefully plan for conversations about sensible and systematic ways to design and continuously enhance the performance management system; not just for the CEO, but for all senior executives and physician leaders. In assuring this piece of the compensation puzzle is in place, the organization is going a long way to ensure that their pay practices are in-line and will hold up to the scrutiny that may be given to their organization. Our Governance and Leadership practice will be issuing additional strategies throughout 2009 to enhance both the efficiency and effectiveness of your systems for executive, physician, and board leaders performance management. For additional questions or to request additional information, please contact jim.rice@ihstrategies.com or call 612-703-4687 w w w. IH S trategies.com 6

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