Remember the old vaudeville joke “The food in this place is terrible–and there’s so little of it!”?
That about sums up popular feelings concerning top-level performance reviews; they’re pointless, and they don’t happen often enough.
“I know of very few CFOs who have received performance reviews since they’ve been in that position,” says Jerry McAdams, a national practice leader at Watson Wyatt Worldwide in St. Louis. One former CFO of a $3 billion midwestern concern, who did get reviewed each year, has dismal recollections of the experience. “I think somehow he was embarrassed to do it,” the former finance chief says, noting that the boss’s whole demeanor changed when there wasn’t a specific item on the agenda. The review amounted to the CEO “calling me in at performance-review time and saying I’m doing a great job.”
Many chief executives share the view of Bruce Edwards, a former CFO who is now president and CEO of Powerwave Technologies Inc., in Irvine, California. “The CEO-CFO relationship is such that there is constant feedback, so it’s a matter of a validation of what has been happening,” he says, describing his own review of the CFO as “a quick recap.” Formal appraisals “take on a much higher degree of significance with other members of the management team.”
Yet a sampling of finance chiefs by CFO magazine suggests this situation may be changing. According to our survey, about 62 percent of CFOs receive annual reviews, and most who do not would like to. Strikingly, some top executives are not just waiting for the CEO to step up to the plate–they are starting to take an active role in designing their own reviews. Their work is helping change the performance review into a detached and interactive process through which CEOs can clarify the finance-department head’s objectives, improve follow-through, and point to the personal or managerial skills that need developing.
Here’s how some companies are turning what can be a painful, awkward, or pointless routine into a useful exercise that weaves the overall corporate plan into specific, individual targets.
DO IT YOURSELF
One solution is for CFOs to do it themselves. That’s the path chosen by Beckman Instruments CFO Dennis Wilson, a recent convert to the efficacy of the performance review. During the first half of his 28 years he spent climbing the ladder at the Fullerton, California, maker of laboratory measurement and research systems, he says, he can’t remember getting a single review that was worthwhile. “They covered the ‘what’ of what we were supposed to do,” says Wilson, “but the thing that was missing for many years was the ‘how,’ the soft part that’s a key element in any supervisor’s message.” But now, he and chairman and CEO Louis Rosso integrate executive reviews–not once, but twice a year–into both annual and long-term strategic planning.
“It’s a very, very thorough process,” says Wilson. Feedback on his own work, for example, is collected from all internal and external finance “customers,” including outside auditors, insurance brokers, and bankers. Wilson drafts an assessment of his performance himself, and then he reads the assessment Rosso drafts for him.
They use three-part forms that are produced by the human-resources department, as they are at many companies. The reviews are used in a Beckman management system that details and analyzes progress in “critical focus areas” and measures each executive’s performance in “essential work outcomes.” The focus areas are shared with other senior managers. That puts Wilson among the 22 percent of CFOs in our survey who say that some results are shared with senior management.
If a company expects to manage by setting objectives, says CEO Rosso, “then the behavior must begin at the top,” with reviews. He avoids any sense of embarrassment by treating top-level sessions as “part of a high- performance culture” at Beckman.
In Wilson’s case, one targeted outcome this year involves optimizing earnings, cash flow, and balance- sheet figures, while another aims to develop a better research-and-development measurement system. Past review-target accomplishments include the creation of finance career-development programs that identify and monitor key people and serve in succession planning.
Having just finished a review in July, Wilson is looking forward to February, when he’ll again sit down with Rosso to set objectives for the next year. “The way we do things creates much more dialogue,” the CFO says, “so reviews aren’t just a pat on the back.”
“HUNGRY FOR FEEDBACK”
At Owens Corning, the $3.8 billion glass- composites and building-materials company in Toledo, senior vice president and CFO David Devonshire has made a science of benchmarking CFO performance in what he calls a “nine- square grid.” This scoreboard has three rows of boxes, relating to shareholder value, the satisfaction of internal and external customers, and a quality listed as “individual dignity.” Numerical and other targets are established in each of the nine areas, which Devonshire uses to meet the expectations that CEO Glen Hiner sets out for him at their formal year-end meeting (see “Evaluating by Grid,” page 50). “It’s a good clear way of measuring the effectiveness… of the contemporary CFO,” Devonshire says.
Unlike some other CEOs, Owens Corning’s Hiner believes that finance chiefs, and CEOs as well, desperately need the kind of frank appraisal of their work that a good performance review can provide. “The higher you get in the organization, the less candor and feedback you get,” he says. Most CFOs have become successful because they are driven, and are “hungry for feedback,” as Hiner sees it. “That drive doesn’t go away. The only way to do something bigger and better is to get some feedback” about what you’ve accomplished so far.
Devonshire’s current agreed-upon goals in the grid’s shareholder-value row target cash flow from operations at 12 percent of sales by 1999, compared with the current 9 percent, and shoot to boost earnings before interest and taxes (EBIT) to 14 percent from today’s 12. His “finance indices” include working capital below 10 percent of sales and costs below 1 percent of sales. Under “global leadership,” objectives included a more diverse work force and cross-functional expertise, while another box, headlined “change agent,” rates him at setting a course for “bold outcomes.”
Devonshire credits the rigorous performance template with helping align the efforts of the entire finance department and for helping improve Owens Corning’s results. When Devonshire joined the company in 1993, cash flow from operations was only 6 percent, for example, with EBIT bogged down at 7 percent.
PERFORMANCE BY AGREEMENT
Other companies work with simpler models in trying to make the CFO review relevant to today’s needs.
At Tenneco Inc., the $6.6 billion Greenwich, Connecticut, automotive-parts and packaging manufacturer, CFO Robert Blakely and other managers draft “performance agreements” at the start of each year. Blakely’s is reviewed by CEO Dana Mead, and the two delineate both traditional financial objectives and qualitative personal ones.
Drawing up a written contract that the CFO can fulfill–or break–is part of Tenneco’s four- year-old management planning and control process, which Blakely says “took a company driven on financial accounting systems to one driven on performance systems and forecasting.” In each year’s fourth quarter, Blakely asks those working for him to provide their lists of priorities for the next year. He also asks the board for its priorities for finance. From the lists, he prepares a summary memo outlining what items should be in his performance agreement when he and Mead prepare it.
“It’s not vague or general,” says Blakely, whose current agreement, for example, calls for him to hit working-capital targets and reengineer the cash-forecasting process. And it’s hard to take the reviews for granted, because meeting objectives “affects my compensation significantly,” he says. “Believe me, there’s a minimum of process and a maximum number of specific tasks in our performance agreement.”
At Hannaford Bros. Co., a Scarborough, Maine- based supermarket operator, creating precise targets is also a guiding principle for senior vice president and CFO Blythe McGarvie and president and CEO Hugh Farrington. Reviews grow from the company’s three-year strategic plan, which serves as “kind of an umbrella for specific thoughts,” McGarvie says. “At the end, we come up with four or five bullet points about what [Farrington] expects from me for the coming year.” Two current goals: getting the general ledger on the company’s intranet–as part of a drive to slash cycle times by 35 percent and speed up decision- making–and redefining and simplifying how finance generates its pro forma financial statements for new locations.
“It’s a chance to sit back and make sure we’re going in the right direction and doing the right things,” Farrington says. That both he and Mc-Garvie use the word “fun” to describe the process probably reflects all the times in Farrington’s career he has found himself on the wrong side of the big desk, hearing the boss drone through a meaningless review. “You come out of sessions like that saying, ‘I’ll never treat anyone like that.’” He shuns the traditional HR-department review forms. “I haven’t found a form yet that really captures the kind of relationship I want to have with people who work directly for me,” he says. “What I’m after is to fit the review to the personal style of the individual.”
In McGarvie’s case, that style involves plenty of questions about Farrington’s reactions to her work. “You have to ask for feedback,” she says. “I want to know what he thinks of how I’ve done in the past year and how I met those expectations.”
With CFOs prizing the role of performance evaluations in building “communication and trust with the CEO”–65 percent in the survey list that as the review’s main benefit– such interactivity indeed may be a valuable quality. It could also be a blessing for CEOs, who don’t always have an easy time appraising CFOs. John Hall, retired chairman and CEO of Ashland Inc., a consolidated energy and chemical firm, concedes that reviewing other members of the senior management team can be uncomfortable, especially “when they’re about the same age and you’ve worked together for a long time.” But Hall viewed the annual exercise as a discipline that made certain criticisms easier to deliver–and that set an example for other managers. “If I don’t do my reviews,” he says, “I can’t expect them to do theirs.”
“GET OUT OF YOUR OFFICE”
Anne Meek, CFO of Active Construction Inc., in Gig Harbor, Washington, thinks CFOs can give the boss a break by taking the lead in their own review process. “You don’t put all the burden on the CEO,” she says. “What we’ve done is to make it a two-way street. I submit to him what I feel I’ve accomplished in the past year, and objectives for the new year.”
Meek came up with the back-and-forth format for Active’s “employee development meetings,” as the $15 million underground-utility company calls its performance reviews. The appraisals concentrate on behavior related to customer satisfaction, job proficiency, and working with others. As a result of Meek’s own rating from company president Walter Smith, one personal goal this year is to meet more with her people–and specifically to talk every day with all five of her immediate subordinates. “We accountants tend to put on our green visors and stay in our offices,” she says. When it comes to developing good communication skills, “I have to make myself do it.”
Northern Telecom Ltd., the $12.8 billion Brampton, Ontario, digital networking company, takes the two-way philosophy to extremes. CFO Wes Scott drafts two or more pages of goals each January and goes over them with CEO Jean Monty. Then in July, Scott submits a written evaluation of his own work, which Monty uses to provide his feedback. The next January, the results are shared with the board, something done by fewer than 30 percent of the firms in the CFO survey that hold regular performance reviews. An “individual performance factor”–a multiplier grade that’s part of Scott’s review- -determines his share of the executive incentive-pay pool. About a third of the companies in our survey use numerical ratings, with an essay summary written by the CEO being the most popular form of documentation by far.
THE 360 APPROACH
Among formal performance reviews, the 360- degree appraisal is on the cutting edge. In the 360, CEOs solicit comments from the peers, subordinates, and others who work with executives–a process even more extreme than the one in use at Beckman Instruments. But while a recent William M. Mercer Inc. survey of general performance-review practices found 19 percent of firms reporting some use of the 360 review, CFO’s own study indicates that such an approach is nowhere near that prevalent in evaluating chief financial officers.
At Eastman Chemical Co., CFO Virgil Stephens does get comments from the board, his finance staff, operations managers, and even institutional shareholders, as well as the $4.8 billion Kingsport, Tennessee, company’s CEO, Earnest Deavenport. As it does at most 360-degree companies, the feedback stays separate from the appraisal of how Stephens is meeting his objectives–and from the setting of his pay. The bulk of his 360-degree feedback comes from a survey with four questions:
Deavenport, who himself has received regular reviews in each of his 37 years at the company, says that the Eastman Kodak tradition calls for them to be a valuable tool for career evaluation and development. (Eastman Chemical is a Kodak spin-off.) And even in evaluating senior executives, he says, it is never awkward for him, because “we all know the objective of these sessions is to develop a win-win situation.”
Says Stephens, “The focus is on continuous improvement, and what each individual can do to improve his performance. It creates an opportunity for people to perform at higher levels than they could otherwise.” Indeed, he adds, “every time I’ve participated in this type of evaluation, I’ve received new insight about my performance.” The last one showed that Stephens, like Anne Meek at Active Construction, wasn’t spending enough time with the staff. He now schedules lunch with each of the heads of his finance organization, sits in on meetings of finance quality-management teams, and blocks off time for simply walking around.
What of the firms that choose not to provide formal reviews of the CFO? William M. Mercer Midwest practice leader Ed Bancroft, who conducted Mercer’s general survey of performance reviews, notes that CEOs of some large companies with no annual review policy still deliver like gangbusters on the bottom line.
Nonetheless, there’s that aching need on the part of CFOs to hear some straight talk from the chief executive. In fact, of the executives in our survey that don’t get reviewed regularly, more than half said that formal evaluations are a good idea.
One is Leslie Beekharry, CFO of Marjam Supply Co., a $100 million Bayshore, New York, wholesaler of building materials. Marjam has been growing at a healthy 15 percent a year, but Beekharry gets no review at all. “I really set my own goals,” he says. Beekharry benefits, he says, from having a CEO who “has the same vision as I do.” Their communication is so good, he says, that “we interact not so much as employer-employee, but as friends.”
An ideal relationship? Perhaps, says Beekharry, except that he yearns for a formal evaluation. “Having a performance review,” he says, “is like having a different set of eyes.”