ceo-bonus
Business Management

Are You Really Measuring Your CEO?

The share price isn’t always the most reliable guide to executive performance. As analytics improve should shareholders be demanding more meaningful data? Steve Jones, Strategy Director for Big Data and Analytics at Capgemini, discusses why organisations should place the CEO under ever increasing scrutiny.

How should CEO performance be measured? To paraphrase management guru Peter Drucker, there’s only one meaningful metric in business: how many customers you create. But ever since the concept of shareholder value was first popularised in the 1980s, companies have favoured one metric above all – the share price – measuring CEOs not on tangible products and services but primarily on whether they can exceed analyst expectations with metronomic consistency.

The main problem with shareholder value is the short-term outlook it imposes on the CEO. When the board’s performance is pegged to the share price, hitting the quarterly numbers can often seem more important than taking a longer-term view of where the market might be headed. At the heart of the matter is the type of CEO behaviour you wish to incentivise:  short-term focus or long-term vision.

A disproportionate emphasis on the share price not only takes up large chunks of the CEO’s time, it also switches attention to a metric that isn’t always a reliable predictor of future value. There’s a reason why business schools are often the most accurate evaluators of CEO performance – academics are more inclined to apply hindsight to their analysis. Shareholders on the other hand must judge CEO performance in real time. And as any investor will tell you, the current price of a stock is often a very poor guide to its price in the future.

If we want our CEOs to perform better, we need to start paying attention to different performance indicators. In the era of data analytics, there are increasing opportunities for more rounded analysis of CEO value. How much CEOs should be paid, and more important, whether or not they should be retained, are questions that analytics can answer. If the business is more measurable, that makes the CEO more measurable, too. And the more measurable the CEO, the less prominent the role of luck in driving CEO behaviour.    

Luck plays a part in even the most celebrated of CEO CVs. The key for boards is to minimise its impact, by measuring the ability of the company to execute on strategy alone. If a water company digs a well and mistakenly strikes oil, it will undoubtedly make the company more valuable. On many conventional measures, including the share price, the CEO is due a big bonus. But should blind luck be rewarded?

Companies must look to the CEO not simply to define strategy but to clearly articulate how its goals will be tracked and managed. The information required to do this is often available inside an organisation but externally it is hidden in the collated financial reports, which are written largely to please regulators, not to demonstrate adherence to strategy. Shareholders and non-executives need to push their executive boards to publish formal KPIs for strategies and robust mechanisms via which they can be tracked.

Using inferior metrics leaves the company’s long-term competitiveness to the vagaries of market forces, and, as demonstrated by the 2008 crash, encourages short-term, high-return strategies which undermine long-term viability. In other words, bad metrics accentuate the role of luck and encourage bad practice.

This problem is particularly acute not only in financial services, but also in the technology industry, where continuous innovation is necessary for long-term survival. To keep pace with progress, the stock price must occasionally be risked in the short-term for bigger picture, longer-term bets.

Consider Apple’s iPad. When the company first launched its tablet, critics warned sales might cannibalise Apple’s desktop range of computers. And in a brand new category there was no actual data to suggest that tablets would sell at all. Apple’s stock price was at risk, yet the CEO’s strategy was set in spite of these short-term considerations. Jobs believed that tablets were a new form factor that would add long-term value to the company.

What shareholders are really paying for is strategic insight, wedded to the leadership skills to execute on that strategy. But that doesn’t mean it’s always wise for CEOs to ignore the short-term data. Apple’s launch of its iPad mini showed that strategic objectives should be jettisoned when the data prove intuition to be false. Jobs famously railed against smaller, 7-inch tablets, believing that smaller screens weren’t a viable format. When the data proved Jobs wrong, and rivals started to sell large quantities of smaller devices, Apple switched strategy and the iPad mini went on to become a hit. 

Enhancing CEO measurability is about the ability of a CEO to demonstrate their true impact on the business. Do shareholders fully understand how the business is being managed? Are business lines following the CEO’s direction? Too often, executives discover that a good strategy has been badly implemented but they find out too late to correct it.  There are multiple examples of good M&A decisions undermined by poor implementation. The merger of Daimler-Benz and Chrysler appeared to have strength on paper but an inability to align the companies around a cohesive strategy ultimately proved fatal. To offer more chance of success, non-executives must insist a CEO shows how they will measure the success of their strategy. Merely articulating it is not enough.

Companies need greater traceability of information and greater transparency into how different aspects impact the strategic goals of the business. Only with this data-led ‘dashboard’ can executives assess in real-time whether their objectives are being met. And only through access to the right metrics, KPIs and milestones can non-execs and shareholders determine whether a strategy is being executed.

If shareholders want to gain a more accurate impression of board performance, and incentivise the right behaviour, they must change the metrics they use to measure performance. And executives themselves must use data to prove they are in control and have clarity over how their strategic decisions are being tactically executed. CEO performance can be accurately assessed, but only with meaningful data. 

 

Steve Jones is Capgemini’s Strategy Director for Big Data and Analytics

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Steve Jones

Steve Jones is Capgemini’s Strategy Director for Big Data and Analytics

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