The BoardCEO Partnership for Performance: Fresh insights into the Annual Performance Appraisal

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The Board-CEO Partnership for Performance Fresh
insights into the Annual Performance Appraisal
James A. Rice, Ph.D., FACHE Vice Chairman, The
Governance Institute Practice Leader Governance
Leadership Integrated Healthcare Strategies May
19, 2008
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CEO Performance

• Drives Organizational Performance
• Value of Balanced Score Card Discipline
• Benefits from planning, formality, investment

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One of the Boards Most Important Roles
ResponsibilitiesLeadership Performance.

• Board-CEO Relations
• Culture, Respect, Rapport, Communication, No
  Surprises
• Performance Planning, Support, Appraisal
• Shared expectations, formality, focus on
  professional and organizational growth
• Executive Compensation
• Competitive, creative, reasonable, linked to
  performance, transparent
• New Associations with Physician Leader
  Compensation
• growing complexity, IRS scrutiny, need for
  competency development
• Leader Succession and Continuity Planning
• day one, not just at retirement, not just at
  transition, not just CEO

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Competency Based Leadership Enhancements
Better CEO-Board Relations yields Better
Organizational Performance. 8 Building Blocks for
Great CEO-Board Relations
Now?
Performance Expectations
Enhancements?
CEO-Chair Relations
Now?
Enhancements?
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Now?
Competitive Performance Comp
Enhancements?
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Coaching
Now?
Enhancements?
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Performance Assessment
Now?
Enhancements?
Now?
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Succession Plans
Enhancements?
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Now?
Development Support
Enhancements?
Relationship Communications
Now?
Enhancements?
I.D. Factors in each sphere that could Frustrate
success or best practice, then define practical
actions that should remove, reduce or work-around
the factors. This will be about 80 of your
successful Enhancement Plan I.D. Factors in
each sphere that will Facilitate success, then
define actions to increase chances that the
factors will occur. This will be essential 20 of
successful Enhancement Plan
What is best practice in each sphere? How are we
doing now in each sphere? How should we try to
get better in next 9 days, next weeks, and next
months?
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• Key steps
• How do you earn respect, rapport and trust?
• Passion for mission of organization
• Openness and candor care enough about each
  other to communicate freely
• Open books, minds, hearts, information
• No surprises
• Clear expectations
• Foster culture that is
• Patient centered
• Performance driven
• Values based

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Performance Goals

• Base is organizational performance targets
• Consider performance pillars
• growth, quality, finance, service, community,
  people

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• You should expect an effective evaluation to
  accomplish at least the following
• It clarifies the boards expectations of the CEO.
• It provides clear goals to help the CEO identify
  and prioritize work to be accomplished.
• It educates the board about the nature of the
  CEOs responsibilities, roles, and duties.
• It focuses the CEO on things that really matter
  to the board and to the direction of the
  organization.

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• An effective evaluation also benefits the CEO
• It helps the CEO develop and upgrade his/her
  competencies and experiences.
• It gives the CEO an opportunity to engage in
  self-assessment of personal performance.
• It provides the CEO with honest feedback,
  direction, and reaffirmation regarding
  performance.
• It eliminates surprisethe well-known
  board-to-CEO evaluation pattern known as good
  job, good job, good jobgone!1
• 1 Ewell, Charles. CEOs, remember who hired
  you. Modern Healthcare, Nov. 10, 1997.

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• Qualitative measures can be broken down further
  to specifically focus on CEO compliance with
  board mandates. Here are some examples (most
  boards will use these as a starting point to
  develop and refine their own criteria)
• Overall organizational performance through a
  series of quantitative measures such as
• Financial performance against the budget
• Current financial ratios
• Operating indicators such as length of stay,
  average daily census, etc.
• Bond rating
• Physician satisfaction through physician leader
  confidence ratings
• Employee satisfaction from survey scores and
• Progress toward accomplishing short- and
  long-term organizational goals as set forth by
  the board.

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• Leadership and managerial excellence through a
  series of qualitative performance measures such
  as
• The extent to which the CEO contributes to the
  organizations vision being fulfilled, its key
  goals being accomplished, and its core strategies
  being effectively pursued
• The extent to which his/her leadership style fits
  the organizations needs (e.g., strong
  management, management functioning as a team,
  replacing weak managers in a timely fashion,
  etc.)
• The effect of the CEOs leadership on setting the
  tone for the organization by showing consistent
  values of high ethical awareness, honesty,
  fairness, etc. (Is his/her conduct becoming to
  the office of the CEO?)
• The CEOs contribution to institutional success
  through his/her guidance in planning, human
  resources management, quality, fiscal management,
  compliance with regulations, advocacy, promotion
  of the hospital, and his/her leadership ability
  and
• The extent to which the relationship between the
  CEO and the board indicates his/her respect for
  the boards independence.
• Compliance with board policy or provisions of the
  employment contract that specify what the CEO
  must and must not do
• Examples of activities the CEO must undertake
• The CEO will keep the board informed on all
  important matters affecting strategies and
  operational performance, and deal with the board
  employing a doctrine of no surprises.
• The CEO will behave in both personal and
  professional dealings in a manner that would not
  embarrass the hospital.
• The CEO will be involved in the community that
  constitutes the primary service area of the
  hospital.
• Examples of activities prohibited by the board
• The CEO will not engage in or knowingly allow
  employees to engage in any act that would be
  judged by a reasonable person to be unethical or
  illegal, or that violates board policy.
• The CEO will not accept any gifts or other
  gratuities that have a value exceeding XXX,
  whether products or services, from individuals or
  organizations doing or seeking to do business
  with the hospital.

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• Bakers Dozen Critical Steps for an Effective
  Performance Evaluation Process1
• Have a job description for the CEO, and make sure
  it is up to date
• Have written organizational expectations
• Have the process guided by a special committee of
  the board (e.g., executive committee), but
  approved by the full board
• Give the committee and the CEO the responsibility
  of developing the criteria for CEO evaluation
• Identify performance criteria that matter the
  most to the organization and the board, and
  evaluate the CEO on only those criteria
  explicitly set forth
• Make the boards expectations of the CEO
  realistic
• Make sure the CEO agrees that what he/she will be
  judged on is clear and unambiguous (with the
  right to reasonable interpretation)
• Identify specific measures that will contribute
  to CEO compensation increases and bonuses (use at
  a later date as part of overall compensation
  consideration)
• Decide on the design and content of the
  questionnaire
• Distribute, collect, tabulate and analyze
  results, and compare results with CEOs responses
  to the questionnaire (his/her self-assessment)
• Present findings in committee to the CEO, get
  his/her feedback, and determine CEOs performance
  plan for the upcoming year
• Present summary of findings and results of
  meeting with the CEO to the full board and
• Expect a report on progress quarterly.
• 1 Adapted from the Governance Institutes
  White Paper 34, CEO Performance Evaluation.

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• See sample CEO appraisal formats as start to
  consider refining yours

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And just when it all seemed so simple ...
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Rebuttable Presumption of Reasonableness

• The IRS regulations provide how an organization
  can shift the burden of proof to the IRS to prove
  that executive compensation is unreasonable. By
  following three process steps, the organization
  creates the
• Rebuttable Presumption of Reasonableness
• Independent members of a board or committee
  review and approve compensation
• Make decisions based on appropriate comparability
  data
• Promulgate contemporaneous minutes/written record
  of approval of the bodys work

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Rebuttable Presumption of Reasonableness

• Create an independent Compensation Committee
• Articulate responsibilities
• Committee Charter
• Consistent with by-laws
• Independent body
• No disqualified persons as members
• No subordinate reporting relationship to a
  disqualified person
• Not receiving any payment that is approved by a
  disqualified person
• No material financial interest in serving on the
  Committee
• No quid pro quo arranged or expected

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Rebuttable Presumption of Reasonableness

• Make decisions based on appropriate comparability
  data
• Committee hires consultant directly
• Committee develops Compensation Philosophy
• Market position
• Peer group
• Committee supervises all compensation and work
  product
• Looks at all elements of compensation
• Salary
• Incentives
• Benefits
• Perquisites

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Rebuttable Presumption of Reasonableness

• Conduct the meeting showing independence and
  diligence
• Excuse any member with a conflict of interest
• Enter into executive session
• Express intent to develop a rebuttable
  presumption
• Document time spent discussing data
• Use consultant to explain data
• Articulate rationale for any decisions outside
  compensation philosophy
• Record action of committee
• Process, process, process

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IHStrategies Recommended Best Practices
sample
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IHStrategies Recommended Best Practices
sample
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IHStrategies Recommended Best Practices
sample
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IRS Form 990

• Redesigned 990, first since 1979
• Three guiding principles
• Enhancing transparency to provide the IRS and the
  public with a realistic picture of the
  organization, along with the basis for comparison
  to other organizations.
• Promoting compliance by accurately reflecting the
  organizations operations so the IRS may
  efficiently assess the risk of noncompliance
• Minimizing burden on filing organizations
• Most organizations will not experience a
  material change in burden, while those with
  complicated compensation arrangements, related
  entity structures, and activities that raise
  compliance concerns, may see an increase in the
  effort required to provide information.
  (emphasis added)

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Some of the proposed implications of the new 990

• Yes or No questions
• Did the organization use a process ... ?
• Did the organizations governing body review the
  990 before it was filed?
• Were persons listed on the 990 paid based on
  revenues or net earnings?
• Were any non-fixed payments made to persons
  listed on the 990?
• Were any payments made subject to initial
  contract exception?
• Schedule H Hospitals
• Charity and community benefit reporting
• Schedule J Compensation
• Applies when an organization pays more that
  150,000 or 250,000 to at least one individual
• Seeks detailed information
• Under discussion
• Potential reporting of all individuals who earn
  in excess of 100,000
• Ratio of executive compensation to total program
  service expenses

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IHStrategies Recommended Best Practices

• Comprehensive executive compensation media plan
• Compensation Committee information
• Compensation philosophy and peer group
• Key market economic data
• 990 Information
• 990 Competitor information
• Board Chair/Compensation Chair training
• 990
• Common questions
• Media training
• Transparency strategies
• Board
• Physicians
• Others
• Consultant retention to serve as a resource

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Hospital Compensation Governance Grade Card
Not Compliant F
Minimally Compliant D
Highly Compliant B
Gold Standard A
Compliant C
Independent Committee
Comparative data utilization
Total compensation review
Access to consultant
Minutes records
Tally sheets
990 review