How Do We Measure the Effectiveness of CEOs?
We often see the Top 100 list for CEOs and even more often the Top 100 in compensation. It’s usually just entertainment where few readers or journalists really know enough to understand the lessons and reasons for “success” of these CEOs. Many are living off the investment and strategy of their predecessor many years ago with an average CEO tenure of seven years.
I just read one of these "Top 100" lists in Harvard Business Review that has the level of insight of a local newspaper, not HBR. Guess that’s why I gave up reading it after 15 years, ten years ago. It talks about Amazon.com's intense customer focus as the reason for its success and that of Jeff Bezos as a top CEO. Hogwash! Did you ever try to get anyone on the phone at Amazon? I love them too – but 100% electronic customer service really. Amazon is a middleman that forces their suppliers to perform well. They are a distributor where there had to be a few winners and Jeff had the vision early. They almost went bankrupt multiple times and had to raise money overseas, just like Walt Disney and others with a long-term vision that was capital intensive. Now I agree Jeff Bezos is a top CEO don't get me wrong. However, he is one of the few on the list that started and ran the company, developed the vision and knew how to execute too. Companies have four layers needed to be successful: Vision (5-10 years out), Strategy (focus for 1-3 years), Management (this year, quarter and month operating plan and the managers) and execution (every employee). Any one not done well will slow down the whole company every time. Realistically only the top 5% to 15% of companies get them all right. They are the market leaders and innovators.
I guess what is going on here with these Top 100 lists is we are expecting journalists to provide magic business insight somehow. These are not a way to gauge success or even determine the metrics of success. Top metrics are obvious, old hat and I have listed some below for you. That little bullet list is more insight than this entire HBR article in my opinion, which is about CEO star power really. Entertainment Tonight or TMZ for businesspeople here. Not that I don’t enjoy a little of that now and then. But “insight”? Not!
It is the short-term focus from Wall Street quarterly reports that fights most CEOs sticking to a vision so they can make their “numbers” and bonuses. Shame on them and shame on their Board of Directors if they have the resources to do better. Europe does not do this and allows more long-term thinking with annual numbers in most countries I believe. Of course, they have other problems like forced employment after 200 employees. Few CEOs have the independence, job security and guts to invest for the 5-10 year time frame like Bezos, Gates and Google. Few have the obscene profits to do that too. You need a cash cow business like MS-Office or Google AdWords to fund the next generation of products when the time frame is long.
Key metrics for big, public companies at highest level:
- Total Market Cap (emotional in some respects but over long-term – Like Buffet don’t watch daily or even monthly stock price. Steady equity value growth is the goal.
- Market share and momentum in their space
- Recurring revenue growth – this revenue is better because it has lower sales and marketing costs and locks in customers. It drives better P/E multiples.
- Innovation - % of revenue from new products in last 1-2 years
- Revenue growth rate compared to their industry
- Profit margins compared to industry
- Revenue per employee (also in context of industry)
Again, it is the short-term focus on earnings per share that pressures CEOs and others to do the wrong thing for the long-term and right thing for the short-term. Bezos, Buffet, Gates and others have a long-term vision and act according to that. However, in most small and medium size businesses it is the lack of measuring the right things to drive constant, incremental improvement in the business that holds them back.
These ideas are MBA/CEO 101 really - basic. Sometimes confusing in these big companies with many moving parts and divisions. Often less applicable to small and medium size companies but a good start. Designing dashboards and metrics is an art, but these are just the starting point to compare companies for financial people and investors. They do not drive the business to be better. That is a whole other level of metrics tracking each department, key processes and products. Again, almost never done well.
Maybe it’s just me, as a 25-year CEO but I think I knew this stuff 24 years ago. How do you measure yourself beside the obvious of sales and growth? Your culture? Your employee satisfaction? Your quality? Your productivity? Do you have feedback loop to iterate and improve? These systems are what create great companies.
Every business needs a custom set of metrics to connect its Strategic Plan (5+ year) directly to operations, tactics, monthly goals etc. This is called the “Corporate Dashboard” and should have 40-60 numbers. It is rare that a company even measures 50% of what it should really. Most are lost in the weeds and don’t even know it. I have been designing dashboards that change cultures since around 1991 and have never once see a company and team understand the power of this without an outside consultant to train them and design the metric. Counter-intuitive I know but true too.
We have six free videos explaining this all better here if you scroll down to bottom of that page.
Yes. I find insiders can't possibly get KPIs right. Too much history, conflict of interest, group think and cogitative dissonance. Most internally designed dashboards be both inside-the-box thinking and "gamed". Dashboard design needs a special recipe of balance we only give to our clients. You have to have some trade secrets.
You must use an outside expert. We do a complete Dashboard solution with design, training and coaching through implementation starting at only $5K. It is a bit of a loss leader for us to show how we can improve any company's performance quickly. We created time leverage via all online video training for 24/7/365 access on any device. It is critical that companies do all three methods, training, coaching and consulting, to succeed. Implementing the right metrics is designed to drive culture change and behavior change. Behavior change takes time and should be done incrementally. So, we use an 8-to-12-week implementation plan to guide people through the paradigm shift slowly. To hold their hands as they stretch outside habit and comfort zone to high-performance.
This video in our free 101 Best Practices series on measuring discussing the power of the right metrics and why all high-performance companies and teams need them. Subscribe for one weekly here. It is a great way to have a discussion with managers each week to examine one best practice and ask "Are we doing this one?" 95% of companies are not doing them at all or doing them well at least. Companies that use even a small fraction of these proven best practices will become market leaders over time.