"After I became CEO, I was struck by how perfunctory the board was in its feedback on my performance," he writes in Harvard Business Review. And it's not just his company: He saw the same feeble approach at other companies where he sat on the board. Moreover, it doesn't have to be that way: He has some sensible suggestions for improving the way boards handle compensation.
At his company, the chair of the compensation committee would pop by his office for just 10 minutes after the year-end closed session of independent directors. The chair would note that the board was happy the company had made the numbers, thank the CEO, advise compensation had been approved, and then apologize that he couldn't stay any longer because he had to make a plane. The full compensation package would be handed over and the chair charge off to catch his flight - without ever sitting down.
It struck Mr. Kaufman that as CEO he was being evaluated completely differently from the way he evaluated his own team and the way he had been evaluated before becoming CEO. He guided his own team by collecting input from many sources and assessing performance on multiple dimensions. He worked with them to identify flaws in their management styles and tried to help them adjust before problems arose or their careers got stalled. But his own total worth was based on just three or four financial measures and the independent directors' assessment, he felt, was driven almost entirely by the need to justify their compensation decision.
So he changed things, and offers the new approach as a model others might follow:
Just as CEOs have to go into the field with their own teams, the board had to dig deeper rather than relying on how they perceive the CEO at the structured series of board meetings.
Every year between mid-December and mid-February, each Arrow independent director met with three top executives separately to discuss topics selected by the compensation committee chair. The conversations were focused on the state of the company's strategy, culture, competitive position, and operations. With six independent directors, that meant the opinions of 18 executives were canvassed.
At the board meeting in February following those conversations, the directors held a long, private dinner to share their insights. When two or more directors reported a similar issue, the compensation chair flagged it for the committee to discuss next morning.
At that meeting, the issues were discussed under five headings: Leadership, strategy, people management, operating metrics, and relationships with external constituencies. The committee also considered the CEO's three- to five-page self-assessment on those same topics.
The output of that meeting was reported to a closed session of independent directors, where the CEO's review was finalized, along with the compensation.
The compensation and governance committee chairs then met with the CEO for two hours to give feedback. Mr. Kaufman took notes and spoke only for clarification, not justification. After reflecting on the meeting, he then wrote a two-page memo for the compensation chair recounting what he thought he had heard, to ensure agreement on main points. One time, they weren't: He thought he was supposed to hit the earnings-per-share target at all costs and was told not if that meant compromising strategic investments.
"I found the Arrow process exposed my blind spots before I could get in too much trouble," he says. And if the CEO is getting in too much trouble, it can help directors act more quickly.
