Academic journal article Journal of Managerial Issues

Determinants of the Anonymity of the CEO Evaluation Process

Academic journal article Journal of Managerial Issues

Determinants of the Anonymity of the CEO Evaluation Process

Article excerpt

In the last decade, there has been considerable attention to CEO pay in the popular press. The dominant issue is why CEOs are paid so much and whether they are worth the compensation they receive. The board of directors is charged with the duty of determining the CEO compensation package. The performance evaluation of the CEO is used as justification for the compensation decisions made by the board. Understanding the performance evaluation process may lead to our ability to explain CEO pay. The study of performance evaluations at the top is lacking in our current literature. The main reason for this gap is the difficulty in gathering this type of data. Boards of directors are often reluctant to divulge details about their decision making, especially with regard to the CEO. The majority of the work that has been written about CEO performance evaluation is speculative and prescriptive in nature (Newman et al., 2001; Tyler and Biggs, 2001; Lear, 1999; Verespej, 1994; Longenecker and Gioia, 1988; Goldstein, 1985). The few empirical studies that have been done focus on the issue of comparing CEOs, and the use of bonuses with regard to non-financial criteria (Ittner et al., 1997; Bushman et al., 1996; Ande and Smith, 1986; Gibbons and Murphy, 1990).

CEO Performance Appraisals

While, there are a multitude of studies that examine subordinate performance evaluations (Painter, 1999; Becker, 1995; Landy and Farr, 1983; DeNisi and Stevens, 1981; Kirchner and Reisberg, 1962), few examine the evaluations of top management (Young et al., 2000; Ittner et al., 1997). Young et al. (2000) focused on factors relating to boards of director adoption of a formal evaluation process of CEO performance. They found that institutional pressures affected whether or not boards adopted a formal process as well as whether the board was independent. Other researchers have investigated the utility of evaluating CEOs relative to the performance of CEOs in comparable industries (Ande and Smith, 1986; Janakiraman et al., 1992; Gibbons and Murphy, 1990). Gibbons and Murphy (1990) found that organizations compared CEO performance relative to CEOs in comparable industries in order to make compensation and retention decisions.

Research has shown the use of non-financial or subjective criteria to be important in the determination of CEO bonuses (Bushman et al., 1996; Ittner et al., 1997). Bushman et al. (1996) show that in the determination of CEO bonuses, the board's use of non-financial criteria is greater in firms where the CEO has held his/ her position longer. These authors posit that CEOs with more power are able to influence the board to assess them by more subjective criteria that can be more prone to manipulation.

The CEO evaluation is understandably more complex than that of the typical manager. The type of criteria and the process used to evaluate CEO performance varies from one company to the next. The point of this study is to examine the effect of CEO influence on the anonymity of the performance ratings. It will be argued that CEO performance evaluations will be less anonymous in firms where a CEO has greater influence over the board of directors. We will use upward appraisal research to develop our hypotheses of the anonymity of the CEO evaluation. Using upward appraisal research is appropriate here because research in the area of CEO/board relations suggests that the CEO has considerable influence in the selection and nomination of new board members (Westphal, 1999; Tosi et al., 1997; Hill and Phan, 1991; O'Reilly et al., 1988). Mizruchi (1983) contends that director nominations are made by the CEO with the board involved in the approval of these nominations. O'Reilly et al. (1988) argue similarly, that CEOs control board appointments, which are lucrative, prestigious and highly sought. After board members are appointed, they may be reluctant to engage in strong efforts to control managers either because they fear that they themselves will be replaced or because reciprocity norms are operating. …

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