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Executive Consulting: Strengthening the CEO Performance Review Process

Executive Consulting: Strengthening the CEO Performance Review Process

Health systems are catching up with other industries to achieve higher organizational performance by encouraging improved executive performance. The formulae for higher executive performance requires adjusting at least five dials:

  • Dial 1: A performance-driven culture
  • Dial 2: Employment Agreement
  • Dial 3: Performance Criteria
  • Dial 4: Review Process
  • Dial 5: Performance-Based Compensation

How prepared is your hospital or health system for these five components of a superior performance review system?

A new resource from the Governance and Leadership Practice of Integrated Healthcare Strategies can help your leadership team assess your current CEO performance review process, and follow a roadmap to higher levels of performance in the coming year.1

Background:

Great governance is foundational to great hospital performance. Great governance is supported by strong board-CEO relations.  The CEO performance planning and appraisal system is one of the central vehicles in which board-CEO relations can be clarified and enhanced. Fresh ideas to do this are included in a new two-part white paper:

Part A explores trends in CEO performance development that are shaped by the organization’s business strategy and argues for developing talent through the three concepts of trust, transparency, and truthfulness.

Part B provides a short review of how to introduce an effective CEO performance planning and appraisal system in high-performance health services organizations. The papers are intended to provide an easy read and a tool to stimulate conversations among the senior leaders of the board, executive team and medical staff

Dial 1: A performance-driven culture:

In an era of population health and value-based payments, high-performance organizations intentionally develop cultures that celebrate teamwork to not only restore health but to protect and promote health of not just patients but the communities from which the patients come.

These teamwork-focused cultures have certain attributes:

The American College of Healthcare Executives believes the board of a hospital or health system should evaluate the performance of its CEO annually using the following principles2:

  • The evaluation should include an assessment of the CEO's performance on core leadership responsibilities as established by the CEO's job description. In addition, prior to the start of the operating year, the board should establish a balanced set of well-defined, measurable objectives to be used in evaluating CEO performance.
  • Certain leadership traits such as judgment, communication, and diplomacy may require subjective assessment by the board. To the greatest extent feasible the board should evaluate the CEO's performance based on relevant, multifaceted data relating to performance on community, organizational and individual professional objectives:
    • Community objectives might include initiatives such as reducing disparities in care, improving access to prenatal care, smoking cessation, early detection of chronic diseases, improving  community education about important health topics, etc.
    • Organizational objectives should reflect attention to enterprise risk mitigation and might include a range of clinical quality, patient safety and satisfaction, operational effectiveness, employee and physician engagement, marketplace performance and financial indicators.
    • Individual professional objectives might include establishing effective board, medical staff and community relationships; supporting diversity in the organization, promoting ethical behavior and continuing professional development by participating in appropriate learning and credentialing activities.
  • Providing evaluative feedback for the CEO should be a formal, continuous process involving the board chair or other appropriate board members who confer with the CEO regularly. The board as a whole also should participate by providing feedback through a formal process that collects and collates individual board member assessments of CEO performance, which are considered through documented discussion. The evaluation process should culminate in a formal, annual performance review. Such a continuous evaluation process facilitates timely, meaningful feedback on many aspects of operations and addresses any misunderstandings or gaps in expectations.
  • The evaluation process should enhance the working relationship and information sharing between the CEO and the board rather than feel one-directional. A current CEO position description can be a valuable resource to help guide an effective review.
  • If the board determines compensation in association with the formal performance review, then changes in compensation should be based on an independent, fair market value assessment and should take into account the full range of objectives established as part of the review process and not be based solely on financial results.
  • As an adjunct to the CEO evaluation process, a board self-evaluation process should be considered. Self-evaluations of the full board and individual members enhance the CEO performance evaluation process by assessing the extent to which board members perceive the board and provide clear expectations and effective guidance and feedback to the CEO throughout the year.

Dial 2: Employment Agreement

  • Clearly defines expectations for performance
  • Improves executive job security
  • Improves employee retention

Dial 3: Performance Criteria

Performance criteria should be based on the factors that matter most to the board, such as:

  • Leadership and vision
  • Relations with the board
  • Management skills and abilities
  • Strategic planning
  • Quality and patient safety
  • Payer relations
  • A realistic approach to problem-solving
  • Philanthropic fund development
  • Community relations
  • Medical staff relations
  • Fiscal management
  • Operations management
  • Personal and professional style and persona

Dial 4: Review Process

  • Proactive goal setting
  • Documented annual review with regular check-ins
  • 360 degree feedback

Dial 5: Performance-Based Compensation

Best-in-class organizations establish a board-approved Executive Compensation Philosophy to guide CEO and other executive compensation decisions. High-performance boards work with their CEO, along with the staff support of their CHRO, to establish this philosophy and use it to guide the design and process of linking performance management with performance pay, as well as, to assure CEO development of strategic leadership competencies.

These executive compensation philosophy documents address such questions as determining peer group comparisons and competitive position-to-market, setting amount of pay at risk, outlining fixed verses variable components of reward and recognition, providing levels and standards for executive benefits and perquisites, and considering how to develop future executive capabilities.

The philosophy also clarifies the decision-making role of the board verses management, and outlines the use of outside experts to provide ongoing support, guide decision-making, and assist the board in overseeing these processes.

Factors to Consider in Setting Compensation

  • Market position of the organization
  • Scope and complexity of organization
  • Inflation
  • Tenure
  • Special qualifications of the incumbent
  • Risk or volatility of the position
  • Political or community considerations
  • Organization design/structure
  • Recruitment Challenges

As the Board and CEO continuously look for ways to enhance their relationship, we encourage them to consider these top 10 factors for each to avoid.

TOP 10 BOARD FRUSTRATIONS TO AVOID BY CEO

1. Surprises at board meetings; e.g., a large deal or capital project that is suddenly put on the table.

2. CEOs who give speeches at board meetings that leave little time for quality discussion of future-oriented issues.

3. CEOs who overwhelm the board with management detail or too little information

4. CEOs who treat the board like figureheads, and not as valuable and respected colleagues from whom to invite counsel about strategic directions or community relations.

5. CEOs who don’t seek board counsel until a problem has reached crisis stage.

6. CEOs who are at odds with the physicians too much of the time.

7. Management that gets mired in too much process before acting.

8. Lack of clear performance criteria and difficulty measuring CEO performance.

9. Weak orientation; lack of ongoing education about the complexities of balancing money flows, achieving world class quality in the health sector.

10. Lack of clear expectations of board members and performance assessment

TOP 10 FRUSTRATIONS OF CEOS TO AVOID BY BOARD

1. Board members who don’t show up, show up late, or are unprepared.

2. Waffling on support of difficult and controversial decisions made previously.

3. Trustees who believe that healthcare is “just like any other business” and should be managed to achieve financial results without regard for vision and mission.

4. Board members who have direct or indirect conflicts of interest; boards that expect the CEO to enforce board policies.

5. Board members who get involved in operations decisions or allow senior administrators to communicate directly with them on substantive issues without the CEO’s knowledge.

6. Board members who allow physicians to use social or family relationships to lobby for specific decisions or actions.

7. Failure of the board to select new members who bring needed experience to the board, or whose talents complement (rather than duplicate) those of existing members; failure to select new members who are able to be objective.

8. Board members who are unwilling to devote the time needed to learn about health care as a business, or fail to keep up with changes in health care, financing, and governance.

9. Pressures to work with local vendors that are not competitive on price or service capabilities.

10. Board chair who does not establish priorities, set agendas for meetings, or require committees to complete priority work.

 

How is your Executive Team addressing these issues as you pursue accountable care and value-based payments?

[1] The CEO Performance Review Guide may be downloaded here.

[2] See ACHE source.

 

James A. Rice

James A. Rice, PhD, FACHE is the Managing Director & Practice Leader of the Governance &  Leadership practice of Integrated Healthcare Strategies, a division of Gallagher Benefit Services, Inc.  He focuses his consulting work on strategic governance structures and systems for high performing, tax-exempt health sector organizations and integrated care systems; visioning for health sector and not-for-profit organizations; and leadership development for physicians and medical groups.

Dr. Rice holds master’s and doctoral degrees in management and ...

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