The Art and Science of Measuring CEO Performance

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The long-term performance of a company's stock may be the ultimate test of a CEO's talents. But that's not the only measurement used by boards of directors to gauge how well the boss is doing.

Experts at Wharton and elsewhere say that companies use many different metrics -- all of which can be fine-tuned to fit a company's circumstances. They also say that, even though hard numbers play a critical role in determining short- and long-term remuneration, compensating a CEO can sometimes be as much an art as a science.

Indeed, any number of factors can affect the way CEOs are judged by their boards, including a particular management style (think Robert Nardelli and Home Depot HD; an especially challenging industry (automobiles and labor unions); soft metrics (such as customer satisfaction or R&D); the influence of increasingly well-informed shareholders, and an organization's age (startup vs. mature company).

Earnings Growth Most Critical

The metrics used by boards "are all over the road," says Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, and may include such figures as earnings per share , return on equity , return on assets , return on capital , revenue growth, cash flow and EBITDA , or earnings before interest , taxes, depreciation and amortization . "Typically, it's a blend of earnings targets, sales targets, sometimes the success or failure of dispositions or acquisitions," he notes. "The stock price is a part of it, too."