A formal appraisal process for the senior management personnel of an emerging company can have several important influences on the relationship between the CEO and the members of his or her “inner circle.” First and foremost, a performance appraisal is probably the best way to identify the strengths and weaknesses of the manager in particular situations or over the course of the manager’s regular day-to-day activities. With this information, the appraisal process can be a good opportunity to develop a mutually agreed program to strengthen the weaknesses while simultaneously reinforcing the strengths and finding ways to use those strengths in other areas.
The CEO is therefore able to provide support for senior managers based on a bond of mutual commitment and also is able to provide praise and emotional support to managers that often feel alone and unappreciated given that most of the focus is usually on areas where they need to improve. A formal appraisal process should also include ways for senior managers to express their own needs and ideas and therefore reduce the possibility of misunderstandings between the CEO and the manager with regard to the personal and professional goals of the manager.
When designing a formal performance appraisal process for senior managers, the following issues need to be considered: when and how often the appraisal should be done; what information will be gathered and how it will be gathered; the form and content of the actual evaluation; how should the results of the evaluation be recorded; and how should the results be integrated into the day-to-day activities of the manager during the period following the completion of the review. While performance and compensation are obviously closely related, it is generally recommended that performance and compensation reviews be done separately if at all possible. Studies indicate that the benefits of a performance review are often lost when participants are preoccupied with the fact that they are about to receive new information regarding their compensation. In that case, participants tend to forget that the focus of the performance review should be on their own strengths and weaknesses, and opportunities for improvement and advancement, and become preoccupied with real or perceived comparisons of their performance to others that may arise because of compensation adjustments. Another issue in the case of poor performers is the negative psychological impact of receiving bad news in the evaluation followed quickly by a disappointment in the compensation arena.
The main choices regarding timing of performance reviews is to do all of the senior managers at the same time or spread the reviews out over the course of the year (e.g., conduct a manager’s review on his or her anniversary date of joining the organization). If reviews are all done together this will impose a significant workload on the CEO and will likely increase the possibility that managers will be distracted by comparisons. On the other hand, if reviews are done throughout the year the CEO will be continuously involved in the process and special effort will need to be made to schedule compensation reviews.
When evaluating and communicating information relating to the performance review, the CEO should make every attempt to be systematic, fair and consistent with the methods used for assessment and rewards. When setting goals during the performance evaluation process the CEO should be sure that the goals set for the manager align fully with the reward system established for the manager. In addition, the outcomes of the performance review should be communicated both in writing and orally.
Performance problems for senior managers may arise for a number of reasons including lack of the necessary skills, misunderstandings about the goals and objectives, temporary or permanent personal problems, relationships with co-workers and/or the relationship with the CEO. Solutions vary depending on the type and severity of the problem and should be discussed in detail during the performance review. For example, as appropriate the CEO may arrange for further support or additional training development or may decide to intervene to resolve issues with co-workers. In extreme situations it may be necessary to transfer the manager to other duties or even terminate the relationship if the parties mutually decide that there is no better option. Once the parties have decided on an appropriate plan to address performance weaknesses or other impediments to further improvement, the manager and the CEO should evidence their commitment to the plan both orally and in a brief written memorandum.
While the organizational structure must necessary be somewhat formal, it is impossible and impractical to think any particular structure as permanent. In fact, a number of events can trigger the need to evaluate the efficiency and adequacy of the company’s current organizational structure. For example, changes may occur in the external environment including advances in technology, strategic changes by competitors, new regulations or deregulation in areas important to the products and services of the organization, and shifts in consumer preferences. Internal changes include turnover in key personnel, political skirmishes among departments and strategic changes such as entering into new markets or launching new products.
Before embarking on any major change in a company’s organizational structure several questions should be raised and answered. First, will the change add significantly to the strength of the business and improve operations in a way that is readily apparent to all interested parties? Second, is the change directed at a source of a performance gap or merely upon a symptom? For example, structural change is appropriate when there is a need to reconfigure groups in order to foster more efficient communication and coordination; however, if the real problem is ill feelings between groups of employees then structural change alone will not resolve the issue. Third, how will the proposed changes be interpreted by the affected parties (i.e., managers and employees), particularly those that are not part of the management team that has decided to implement the changes? Unless the reasons for the changes are clearly communicated, mid-level managers and line employees may view the changes as punitive or as changes in values that are not intended by senior management. Therefore it is important for senior management to consider in advance how the changes will be perceived from different vantages points within the organization and this requires insight into how the informal structures of the organization work. Finally, is the change consistent with the values of the company and its reward systems? In particular, there must be ways for managers and employees to demonstrate that they are implementing the changes and incentives must be established to recognize those that support the implementation.
Make sure you remember the recordkeeping requirements applicable to your clients under the securities laws by reviewing my recent post on the Legal Solutions Blog.