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1Amity Journal of Corporate Governance

Volume 2 Issue 1 2017 AJCG

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Amity Journal of Corporate Governance2 (1), (1-17)

©2017 ADMAA

Board of Directors, Qualitative Metrics, and CEO Performance Evaluation

Rezgalla AbdallaOmar Almoktar University, Albayda, Libya

AbstractThe aim of this study is to describe use of qualitative metrics in the evaluation of CEO performance.

Based on 15 interviews, thematic analysis was conducted through NVivo version 10. The findings showed that it is a process which starts with the identification of the company’s strategic objectives and ends with compensating CEO performance. Interestingly, and inconsistent with previous studies, the findings showed that some directors evaluate and compensate CEO performance primarily based on qualitative metrics, which is associated with sustainability, values and ethics, corporate attributes, and individual attributes. The study implicates theories, such as agency theory and stakeholder theory, are inadequate to explain the actual behavior of directors regarding the use of qualitative metrics in performance evaluation. Therefore, this study proposes a conceptual model which describes the use of qualitative metrics in CEO performance evaluation in the Malaysian context.

Keywords: Compensation, Corporate governance, Key Performance Indicators (KPI’s), qualitative metrics, stakeholders

JEL Classification: G30, G39, M52, M49

Paper Classification: Research Paper

IntroductionThe topic of CEO compensation has been a controversial issue in corporate governance

research for the last few years. The main criticism of CEO remuneration is that they receive high compensation, both in absolute terms and in comparison with pay packages received by employees lower down the hierarchy (Yatim 2012). In addition, various studies document that humongous packages for the top tier executives are a result of discretionary accruals, which inflate earnings and stock price, which is considered as an indication of poor corporate governance practices (Chu & Song 2012).

The reason for this phenomenon is that, most boards evaluate and compensate primarily based on quantitative metrics (Siciliano 2002; Epstien & Roy 2005; Kaufman 2008; Schiehll & Bellavance 2009). Accounts manipulation are said to be prompted when quantitative metrics that are short-term focused, historical, incongruent with strategic mission, and relay on cost information are linked to the reward system (Ittner et al. 2003; Kaplan & Norton 2004;Chenhall & Langfield-Smith 2007; Jusoh et al. 2007). As a result, several scholars advocated the use of qualitative metrics in

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Volume 2 Issue 1 2017AJCG

corporate and individual performance evaluation (Kaplan & Norton 2004). Advocators of qualitative metrics, argue that qualitative metrics are credited with being long-term oriented, more in sync with the strategic objective, leading indicators of quantitative performance, reflect performance related to different stakeholders such as employees and customers, and are harder to manipulate (Ibrahim & Lloyd 2010; Ittner et al. 2003; Fitzgerald 2007). Therefore, the use of qualitative metrics in CEO performance evaluation shows that CEO performance evaluation is effective (Northcott & Smith 2010). However, it is not argued that quantitative metrics should be eliminated from the evaluation process, but a mix of both quantitative and qualitative metrics is crucial to ensure an effective performance evaluation.

Many researchers examined the issue of incorporating qualitative metrics in CEO performance evaluation and its determinants (Bushman et al. 1996; Ittner et al. 1997; Schiehll & Andre 2003; Epstien & Roy 2005; Schiehll & Bevllavance 2009; Caranik-Walker et al. 2007; Hassab Elnaby et al. 2005; Balsam et al. 2010; Davila & Venkatachalam 2004). These studies used quantitative research methods based on agency theory and provided mixed results which makes the effectiveness of many corporate mechanisms inconclusive in relation to the use of qualitative metrics in CEO performance evaluation.

Recently, various scholars criticized current corporate governance research which is based on the post positivist approach and agency theory and they asked to address the practical aspects of board of directors based on qualitative research methods to develop practical corporate governance theories (Zattoni et al. 2013; Ahrens et al .2011). This indicates the need to explore and describe directors’ use of qualitative metrics in CEO performance evaluation based on qualitative research methods. Accordingly, this study describes the use of qualitative metrics in the process of CEO performance evaluation.

Literature Review

Theoretical Perspectives Two corporate governance theories, namely agency theory and stakeholder theory, provide

claims which researchers use to make their predictions regarding the use of qualitative metrics in CEO performance evaluation. According to the agency theory, Board of Directors (BOD) use qualitative metrics in performance evaluations because qualitative metrics provide incremental information about agent’s actions and therefore they influence agent’s actions to be more congruent with the goals of the principal (Ittner et al. 1997). However, stakeholder theory argues that the use of qualitative metrics in performance evaluations ensures that value created by the firm is distributed in a fair manner which maintains the commitment of different stakeholders (Kochan & Rubinstein 2000). Therefore, it is clear that current corporate governance theories, principally, agency theory and stakeholder theory, tell very little about board members’ use of qualitative metrics which indicate lack of theory in this respect and most studies formulate their hypothesis based on these predictions. As a result, the study contributes to the literature by describing the use of qualitative metrics in CEO performance evaluation based on in-depth interviews.

Corporate Governance Research of the Use of Qualitative Metrics in CEO Performance Evaluation

Past research have explored the use of qualitative metrics in CEO bonus plans to find out whether qualitative metrics are used with quantitative metrics in CEO performance evaluation



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which is a sign of effective performance evaluation practices. For instance, Schiehll & Bevllavance (2009) using a sample of 184 Canadian companies, found that 55% of the CEO bonus plans use qualitative performance measures. Ibrahim & Lloyd (2010) in a sample of 329 companies found that 28% employ both quantitative and qualitative metrics in executive compensation, while 72% percent employ only quantitative metrics. Epstein & Roy (2005) using a sample of 59 U.S. companies found that 43% of the companies use qualitative metrics with quantitative metrics in the evaluation of CEO performance in the compensation committee reports. Also, Ittner et al. (1997) found evidence of the use of qualitative metrics in CEO bonus plans in a sample of 317 companies in which 36% of the companies used qualitative metrics in the evaluation process. Further, Hassab El Naby et al. (2005) in a longitudinal study found that 38% of 240 sample utilized qualitative metrics in the appraisal of CEO performance.

These studies show that compared to quantitative measures, less importance is given to qualitative metrics in CEO and executive performance assessment which indicates that CEO performance is still evaluated based on quantitative metrics in advanced countries. However, these studies only report the percentages of companies which include qualitative metrics in their CEO compensation plan and do not provide an in-depth analysis about the different qualitative metrics which are used for evaluating CEO performance and whether these metrics are only related to managing the company or they go beyond that to consider stakeholder issues. Except for the study of (Epstein & Roy 2005) who indicated that 100% of his sample use quantitative measures, 42.36% management of customer relations and growth measures, 19.95% use strategic planning measures, 15.25% use management style measures, 13.56% use management of operation measures, 11.85% use management of external relations measures, 10.17% human resource management measures, 8.46% ethics and values measures, 6.78% controls and risk management measures, 3.4% environment health and safety measures, and 3.4% succession planning measures, but the study has not provided in-depth description of directors’ use of qualitative measures.

It can be observed that these studies, have explored the use of qualitative metrics in CEO performance evaluation only report the percentage of the use of qualitative metrics in CEO performance evaluation, compared to quantitative metrics and the findings of former studies which are conducted in advanced countries showed that quantitative metrics dominates CEO performance appraisal. In addition , corporate governance research examines the determinants of the usage of qualitative metrics in CEO reward plan. For instance, Bushman et al. (1996) found that CEO performance appraisal is associated with growth opportunities, product development, product life cycles, CEO tenure, market-to- book value of equity and company size which suggest that quantitative metrics alone are not the only criteria that reflect CEO performance. However, noise in quantitative metrics and stock prices metrics are not associated with individual performance measurement. Therefore, the findings imply that companies which aim to grow would have a wider definition of performance. Ittner et al. (1997) found that use of qualitative metrics in CEO compensation plan is related to regulations level, an innovation-oriented strategy, noise of quantitative metrics, and the implementation of strategic quality systems. Schiehll & Andre (2003) found that the use of qualitative metrics in CEO compensation scheme correlates with board independence. Schiehll & Bevllavance (2009) found that the use of qualitative metrics in the CEO bonus plan correlates with independent BODs and CEO ownership in firms which has high growth prospects. This suggests that independent directors focus on qualitative performance more than executive directors. Caranik-Walker et al. (2007) found that the use of qualitative metrics in the evaluation of CEO performance is associated with BODs which have higher number of executive directors. Balsam et al. (2010) found that an increased weight is given to quantitative metrics such as sales in the evaluation process in executive compensation for companies that



pursue cost leadership strategy. However, there is a decreased weight given to quantitative metrics in companies which pursue differentiation strategy. Therefore, the results suggest that compensation committees link employees’ compensation to the strategy of the firm. Davila & Venkatachalam (2004) found passenger load factor, an important qualitative metric which is utilized in cash bonus plans, and correlates to cash compensation. This finding reinforces the idea that qualitative metrics are more informative than quantitative metrics and thus are positively significant in bonus plans. Ibrahim & Lloyd (2010) found that companies which constantly use quantitative and qualitative metrics in bonus plans have lesser levels of earnings manipulation. The findings imply that qualitative metrics are harder to manipulate than quantitative metrics.

Accordingly, there is limited research which describes directors’ use of qualitative metrics throughout the process of CEO performance evaluation and most prior studies are based on the postpositivist approach and agency theory. This is inconsistent with the findings of (Ahrens et al. 2011) and (Zattoni et al. 2013) which suggest that future corporate governance researchers should open the black-box of directors’ behaviors and practices to develop corporate governance theories through qualitative research.

Research Methodology This study expands on former researches which have explored the use of qualitative metrics

in CEO compensation plans (Schiehll & Bevllavance 2009; Ittner et al. 1997; Ibrahim & Lloyd 2010; Bushman et al. 1996; Balsam et al. 2010; Schiehll & Andre 2003). However, this study explores the use of qualitative metrics using qualitative research using the descriptive approach. Data was collected using semi-structured interview format because it allows researchers to control the time, content, and sequence of interviews (Sekaran 2003). A non-probability sampling technique was used to choose the respondents with experience and in depth knowledge regarding governance issues. In particular, purposive sampling technique was used to choose the respondents based on their long experience in the industry, multiple board membership, and academic and professional qualifications. A number of board members of Malaysian listed companies in the Clang Valley area were selected. Based on purposive sampling, only four board members accepted to participate in the study. In order to increase the number of interviews, snowball sampling technique was used.

The final number of interviews were 15 with board members of Malaysian listed companies. It is not suggested that the insights from these interviews are representative of all Malaysian listed companies’ board members, but the interviews were detailed enough to provide a detailed description of board members use of qualitative metrics in CEO performance evaluation. Also, some of the respondents sit on board of many listed companies, were former CEOs, chair more than board, chair compensation and other committees and are central actors in the creation of corporate policies and strategies in corporate Malaysia. Thus, it is concluded that the relevant voices has been heard.

An interview guide was designed to seek thorough responses on the use of qualitative metrics in CEO performance evaluation and compensation. Generally, the first interviews started with general questions of how board members incorporate qualitative metrics in the evaluation and compensation of CEO performance based on the literature, and then based on the main ideas obtained, questions were framed in subsequent interviews and each interview helped to set the questions for the next interview. Once a respondent agreed to be interviewed, an appointment was made for the actual interview at the most convenient time for the respondents. All interview sessions were conducted at their offices. During the interviews, hand-written notes were taken



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and a tape recorder was used. On average, each interview lasted 30 to 45 minutes, thematic analysis was applied to identifying emerging themes and patterns using NVivo version 10. The findings of the thematic analysis were used to propose a practical theory regarding the use of qualitative metrics in CEO performance evaluation and compensation based on the actual behaviours of board members.

Findings Appendix illustrates the conceptual model derived from the analysis which describes board

members use of qualitative metrics throughout the process of CEO performance evaluation and compensation as well as some associated constructs. Generally, the analysis revealed that, directors’ use of qualitative metrics in CEO performance evaluation starts with identifying the strategic objectives of the company which can be quantitative and qualitative objectives. These strategic objectives are influenced by several factors such as sustainability, ethics and values, corporate attributes, and BOD member’s attributes. Then, members translate the qualitative strategic objectives to qualitative metrics and assign weightage to qualitative KPIs in CEO’s KPIs template. In some cases, qualitative metrics could receive higher weightage in CEO’s KPIs template. Therefore, CEO compensation is determined primarily based on qualitative measures.

However, in some cases even though quantitative metrics receive higher weightage in CEO’s KPIs template, members do not adhere to the weightage of quantitative metrics in the actual CEO performance evaluation to stress qualitative metrics and CEO compensation is therefore determined primarily based on qualitative measures. In the actual CEO performance, usually members collect information regarding qualitative metrics using 360 questions. Also, some members indicated that, there are some KPIs which are shared KPIs among the CEO and management and these KPIs have always been quantitative measures. Finally, BOD members indicated that the KPIs usually change after five years in particular after the revision of the strategic plan, however, the respective weightage could be amended on a yearly basis depending on the focus of the business.

Identifying Corporate Strategic Objectives Generally, the process of CEO performance evaluation starts with identifying the strategic

objectives which might be quantitative or qualitative objectives. The findings indicated that the strategic objectives have both components; quantitative and non-quantitative. Quantitative strategic objectives could be maintaining shareholder value or attaining specific amount of profits or specific percentage of ROE. However, qualitative strategic objectives could be increasing growth engine, change programs, attaining customer satisfaction, enhancing employees’ welfare, HRM, talent management, succession planning, CSR, welfare of the community, transformation plan and maintaining top position in the industry among competitors.

Also, it was observed that many of the above mentioned qualitative strategic objectives are related to many aspects of sustainability. Therefore, if the board aims to be a sustainable company, it has to set qualitative strategic objectives to achieve sustainability targets such as increasing growth engine, change programs, attaining customer satisfaction, enhancing employees’ welfare, HRM, talent management, succession planning, CSR, welfare of the community, transformation plan and maintaining top position in the industry among competitors. Therefore, companies which aim to be sustainable have to incorporate more qualitative strategic objectives than those companies which do not aim for sustainability.



Translating the Strategic Objectives to include Qualitative Metrics in CEO’s KPIs Template

The second theme indicates responses regarding the translation of the strategic objectives to quantitative measures, or quantitative and qualitative measures, or qualitative metrics depending on the company’s strategic objectives which represents the second step after the identification of the strategic objectives. The results indicated that only one respondent translates the strategic objectives only based on quantitative metrics and the remaining respondents specified that the strategic objectives are translated to include both quantitative and qualitative metrics in the template of CEO’s KPIs. Quantitative metrics could be revenue, profits, net-profit after taxes, ROE, stock price, and cash flow; while, qualitative metrics could be staff development, retention of talent, employees morale, employees welfare, succession planning, leadership skills, customer satisfaction, market share, change program, corporate social responsibility, capability development, health and safety, knowledge development and innovation among other metrics which are usually identical to the identified strategic objectives.

Therefore, members include qualitative metrics in CEO’s KPIs template and it is clear that these metrics are related to many aspects of sustainability such as customer satisfaction, employee welfare, succession planning, community welfare which confirms that companies which want to be sustainable would focus on the use of qualitative measurers in CEO performance evaluation as a result of the identification of the qualitative objectives which are related to sustainability.

Assigning Weightage to Qualitative Metrics in CEO’s KPIs Template The third theme which is assigning weightage to CEO’s KPIs represents the third and final

step in designing CEO’s KPIs template. Regarding this theme, three Respondents did not provide the weightage of CEO’s KPIs and the remaining respondents indicated the weightage which is given to quantitative and qualitative measures. They indicated that directors distribute certain weightage to quantitative and qualitative KPIs and determine specific targets and tasks for the CEO based on the strategic objectives of the company. Nine of the respondents indicated that normally quantitative metrics receive higher weightage than qualitative measures, usually 70% quantitative metrics and 30% qualitative metrics or 60% quantitative metrics and 40% qualitative measures, which is consistent with the claim that CEO’s are primarily evaluated based on quantitative measures.

However, two directors showed that they assign higher weightage to qualitative metrics than quantitative metrics which was a surprising finding because it suggests that there are some boards which evaluate CEO’s performance beyond bottom-line and shareholder wealth maximization indicating a wider definition of performance. They justified the importance of the focus on qualitative metrics to ensure the sustainability of the company and long-term interests. The common corporate and individual attributes of these directors which was different from other respondents are that both serve as members in government linked companies, both serve in relatively large boards compared to others in the sample, both have more than 30 years of experience, both hold their current positions in the BOD longer than five years, and both hold a non-accounting degree.

Therefore, it is safe to assume that qualitative metrics usually receive certain weightage in CEO’s KPIs template. Also, some directors indicated that they assign higher weightage to qualitative metrics than quantitative metrics because they believe that the use of qualitative metrics is important to monitor the progress of the company’s objectives which are related to



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sustainability. Thus, companies which aim for sustainability would use more qualitative metrics in CEO performance evaluation.

Also, the analysis revealed some corporate and individual attributes which are associated with the emphasis on qualitative metrics such as assigning higher weightage to qualitative measures. Corporate attributes include government linked companies and large board size. Therefore, companies which have higher governmental ownership and large board size would have a greater emphasis on qualitative metrics in CEO performance evaluation, such as assigning higher weightage to qualitative measures. Individual attributes include years of experience, years in the current position on the board, and holding non-accounting degree. The findings suggest that boards with members with more experience would focus on qualitative metrics in the process of CEO performance evaluation such as assigning higher weightage to qualitative measures. Similarly, boards with more directors on the current position for a period longer than five years would focus more on qualitative metrics in the process of CEO performance evaluation such as assigning higher weightage to qualitative measures. Finally, boards with directors who hold non-accounting degrees would have more focus on qualitative metrics in CEO performance evaluation such as assigning higher weightage to qualitative measures.

KPIs Weightage Role in CEO Compensation Determination The next theme brought a very important point by three respondents which indicated that

the weightage assigned to CEO’s KPIs normally determine CEO compensation level particularly the variable compensation and not the fixed compensation. For instance, if quantitative metrics receive 70% and qualitative metrics receive 30% and the CEO fail on achieving the qualitative metrics targets then the CEO would receive only 70% of his variable compensation.

Therefore, the findings suggest that KPIs weightage play an important role in determining CEO’s KPIs which implicates that future research that examines the determinants of the use of qualitative metrics should focus on qualitative metrics weightage as their dependent variable instead. This is because qualitative metrics are mostly used but the weightage would indicate the importance of qualitative metrics in CEO performance evaluation.

Adherence to CEO’s KPIs Template and Ethical CEO Performance Evaluation The theme of directors’ adherence to CEO’s KPIs template in the actual CEO performance

evaluation showed that some members might not adhere to CEO’s KPIs and their respective weightage as set in the template. Generally, the majority of respondents indicated that they follow CEOs KPIs in the actual CEO performance evaluation strictly which means that they follow the KPIs and their respective weightage as set in the template.

However, four respondents indicated that there are some situations in which the BOD does not adhere to CEO’s KPIs and weightage in the actual performance evaluation, especially, for activities which are related to the core business of the company in order to remain sustainable. For instance, C5 showed that he might not adhere to the weightage of CEO’s KPIs template in the actual CEO performance evaluation where quantitative KPIs received higher in the template and yet C5 emphasized more on qualitative metrics related to succession planning, talent management and human resource management issues in the determination of CEO compensation. Respondent C5 is a chairman of a foreign owned company with experience across the globe spanning several decades. His formal degree was in Quantitative Accounting. C5’s response was: “In terms of compensation I would place a lot of importance on succession planning, talent management and



on HR issues more than quantitative metrics because in Malaysia if you do not have these in place then you start to have a lot of problems”.

Furthermore, three directors indicated that sometimes they even go beyond CEO’s KPIs as set in the template and consider issues such as safety, CEO’s ethics and values, attitudes and behaviors, and leadership qualities even though they are not included in the template. For instance, C4 indicated that the board may place more attention to qualitative KPIs such as the values of the CEO in the actual CEO performance evaluation. Also, he provided an example about Shell and indicated that Shell focus on safety in the evaluation of CEO performance and in fact the CEO could lose all his compensation because of any improper safety management. The profile of C4 indicated that he is a chairman of government linked company, holds a non-accounting degree, serves on a board of a relatively large company (almost half of the BOD members are independent directors).

Also, I1 suggested that he might not adhere to CEO’s KPIs in the actual CEO performance evaluation. The respondent indicated that the board emphasizes on compliance of good corporate governance especially on quantitative measures. However, in the actual CEO performance evaluation I1indicated that he place more importance on ethics and values and stressed the importance of ethical CEO performance evaluation which is another issue which emerged from this respondent. This is because I5 believes that if the CEO has the right values, the matter of performance becomes a consequence. I5 serves as an independent director on the BOD of government linked company, and has a doctorate in finance.

In addition, E1 indicated the CEO’s KPIs template is designed based on the BSC framework but in the actual performance evaluation they might factor in the leadership qualities of the CEO even though no weightage is assigned to this KPI in CEO’s template. This could be because this company uses a very simple performance measurement system which does not include metrics related to the CEO at the individual level. E1 is an executive director on the BOD of family owned company, has more than 25 years of experience, has been in the current position over five years, holds master degree, holds non-accounting degree, the age of the company is between 10 and 25 years, the size of the BOD of the company is large and the company size is quite small compared to others.

Therefore, the analysis indicates that boards might evaluate CEO’s performance primarily based on qualitative metrics even though quantitative metrics received higher weightage in CEO’s KPIs template by not adhering to the template in the actual CEO performance evaluation. There are several reasons which might make directors do not adhere to CEO’s KPIs template. For example, it could be because the board has a simple performance measurement system and therefore they factor in important issues that they need to consider when evaluating CEO’s performance. More importantly, directors also indicated that they might not adhere to the weightage of CEO’s KPIs template even though quantitative metrics received higher weightage in the template to ensure that some aspects of the core business activities are in place such as succession planning, talent management and HRM which are all aspects of sustainable companies. Therefore, it could be said that sustainable companies would emphasis more on qualitative metrics in the evaluation of CEO performance.

Furthermore, directors show that they might not adhere to the entire CEO’s KPIs template and evaluate and compensate CEO primarily on qualitative metrics by focusing on CEO’s behavior, values, and even reputation to decide whether the CEO will be compensated not or down scoring CEO’s performance during the filling of the instrument of CEO’s KPIs template. The reasons that BOD members focus on such issues is because they hold high ethical values such as integrity,



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stakeholder values, values regarding the ethical approach towards maximizing shareholder value and human governance values. They indicated that they believe if the CEO does well at these aspects the shareholder wealth maximization will become a consequence of that.

Therefore, directors with such ethical values would stress on issues which are related to employees’ welfare, customer satisfaction, succession planning, talent management, community welfare and environmental responsibilities as an ethical demand and the final consequence of that is aligned with shareholder value. Therefore, it could be argued that BODs with members holding high ethical values would focus on qualitative metrics in CEO performance evaluation.

Additionally, the analysis revealed some corporate and individual attributes which are associated with the emphasis on qualitative metrics by not adhering to CEO’s KPIs in the actual CEO performance evaluation. Corporate attributes include government linked companies and large board size. Therefore, companies which have higher governmental ownership and large board size would place a greater emphasis on qualitative metrics in CEO performance evaluation such as assigning higher weightage to qualitative measures. Individual attributes include years of experience, years in the current position on the BOD, and holding non-accounting degree. The findings suggest that boards with members with vast experience would focus on qualitative metrics in the process of CEO performance evaluation by not adhering to CEO’s KPIs). Similarly, boards with more directors in the current position for more than five year would focus more on qualitative metrics in the process of CEO performance evaluation by not adhering to CEO’s KPIs. Finally, boards with directors who hold non-accounting degrees would have more focus on qualitative metrics in CEO performance evaluation by not adhering to CEO’s KPIs and therefore compensating CEO’s performance primarily based on qualitative measures.

Use of 360 Degree Evaluation in CEO Performance Evaluation Four respondents confirmed the data regarding qualitative metrics is usually collected in

the form of 360 degree evaluations mainly from employees, customers, and directors which is consistent with literature which elaborates on the board’s role in CEO performance evaluation. The analysis indicates that directors collect information regarding qualitative metrics through the use of 360 degree evaluations from employees, customers and directors to be used in the actual CEO performance evaluation.

However, this indicates that the use of qualitative metrics need efforts and time to obtain the related information regarding the qualitative metrics which many people do not like. This could be one of the reasons that explain why most boards rely on quantitative metrics in CEO performance evaluation. Compared to qualitative measures, quantitative metrics are available and can be easily obtained from computerized systems even on a daily basis and therefore it is easier to rely on quantitative metrics in CEO performance evaluation. Therefore, most boards evaluate and compensate CEO performance primarily based on quantitative metrics.

Use of Shared KPIs in CEO Performance Evaluation The theme of shared KPIs which indicated the concept of shared KPIs in which the KPIs

is cascaded down from the CEO to the middle and lower management levels in the companies’ managerial hierarchy. Also, it was indicated that only quantitative KPIs are shared KPIs but qualitative KPIs are assigned on individual basis using 360 degree evaluations. Therefore, the analysis shows that directors uses shared KPIs in CEO performance evaluation in which quantitative targets are set and all management members as a team are responsible to achieve by



the end of the year. The findings also provided evidence that shared KPIs can only be quantitative metrics such as ROA, ROI, and income among other measures.

This also could be another reason which explains why members of the board evaluate CEO performance primarily based on qualitative metrics because they are shared among the management team so it’s related to the entire team and as mentioned earlier, quantitative metrics are easily available even on a daily basis in computerized systems unlike qualitative metrics which need the use of 360 degree evaluation which requires more effort, time, and commitment. Therefore, board members prefer the use of quantitative metrics in CEO performance evaluation.

Change of CEO’s KPIs Template The theme of the change of CEO’s KPIs indicated that generally boards do not change CEO’s

KPIs on a yearly basis and usually changed after three to five years when the strategic plan of the company is redefined. However, the respondents indicated that sometimes the respective weightage of quantitative and qualitative KPIs could be adjusted on a yearly basis depending on the emphasis of business in the next year.

In addition, the board takes into consideration contextual factors when evaluating CEO performance and they even might redo the KPIs as unexpected changes in the environment take place such as increase in prices or interest rate. Therefore, the analysis shows that CEO’s KPIs changes only after 3 or 5 years, in particular when the strategic plan is reviewed and new strategic objectives are identified. However, the weightage assigned to CEO’s KPIs could be changed on a yearly basis depending on the emphasis of business. Also, if unexpected changes occur in business environment such as an increase in interests rate, that could lead to amendments in CEO’s KPIs template.

DiscussionThe findings regarding directors’ use of qualitative metrics contribute to the literature in

several ways. Firstly, unlike former studies which investigated the use of qualitative metrics in CEO performance evaluation which only report the percentage of the use of qualitative metrics and its determinants among selected companies to understand board members’ use of qualitative metrics(Epstein & Roy 2005; Schiehll & Bevllavance 2009; Ibrahim & Lloyd 2010; HassabElnaby et al. 2005; Ittner et al. 1997), this study has proposed a conceptual model which describes the use of qualitative metrics in CEO performance evaluation process based on the actual behaviors and practices of BOD members consistent with the calls of former studies (Zattoni et al. 2013; Ahrens et al. 2011).

Secondly, some identified themes reinforce some findings in the literature by providing consistent results regarding CEO performance evaluation. For instance, the analysis of the semi-structured interviews shows that generally the CEO performance evaluation process starts with the identification of the company’s strategic objectives, which usually contains both components quantitative and non-quantitative. The analysis of semi-structured interviews also indicates that the strategic objectives are usually translated to include qualitative measures. This pattern of practicing CEO performance evaluation is consistent with previous literature of CEO performance evaluation (Epstien & Roy 2005; Thomas 2001; Anderson & Kleiner 2003; Rivero 2004; Johnson & Bancroft 2005) which indicates how directors should practice CEO performance evaluation. Therefore, this study confirms that these practices have been carried out by members of the board in Malaysia and reinforces the findings of the above previous studies.



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In addition, consistent with former studies, compared to quantitative metrics, directors usually assign lower weightage to qualitative metrics normally 70% quantitative and 30% non-quantitative or 60% quantitative and 40% non-quantitative, indicating that the CEO is primarily evaluated based on quantitative metrics and generally the results suggest that BOD members adhere to these metrics in the actual performance evaluation. This suggests that even though board incorporates qualitative measures, CEO performances are still evaluated primarily based on quantitative measures. These findings are consistent with previous ones which found that CEOs are mainly evaluated on quantitative metrics even though qualitative metrics are used (Epstein & Roy 2005; Schiehll & Bevllavance 2009; Ibrahim & Lloyd 2010; HassabElnaby et al. 2005; Ittner et al. 1997). This suggests directors evaluate CEO performance primarily based on bottom-line metrics showing a narrow definition of performance and consistent with the notion of shareholder wealth maximization.

Directors’ practices are still in line with the conventional business view of performance evaluation which looks at performance in terms of profits and shareholders wealth (Ahrens et al. 2011). Furthermore, this confirms that the purpose of rewarding the management of the company such as the CEO is basically to align their interests with shareholders wealth (Schiehll & Bellavance 2009). Such practices are unfavorable because they would put pressure on management which could make the management focus on the short-term instead of long-term or do unethical behavior such as accounts manipulation to increase the profit and get higher bonus (Ibrahim & Llyod 2010; Lipton 2009; Ittner et al. 2003). Also, consistent with previous studies, this confirms that, directors collect information regarding qualitative metrics through 360 degree evaluation (Epstien & Roy 2005).

Thirdly, the findings provide new empirical evidence to the literature regarding the use of qualitative metrics in CEO performance evaluation. Inconsistent with former studies, this study provided empirical evidence that there are some boards which evaluate CEO’s performance primarily based on qualitative metrics either by assigning higher weightage to qualitative metrics in CEO’s KPIs template or by not adhering to CEO’s KPIs template in some cases. For instance, two directors indicated that they assign higher weightage to qualitative metrics in CEO’s KPIs template such as 20% quantitative and 80% qualitative and 40% quantitative and 60% non-quantitative. This shows that such members of the board perceive the role of the CEO is not only quantitative but is much wider than that to include qualitative metrics which are related to the qualitative strategic objectives. Also, four directors indicated that in the actual performance evaluation they could place more importance on qualitative aspects of CEO performance such as their ethics and values, attitudes and leadership qualities even though these metrics are not incorporated in CEO’s KPIs template. This indicates that there are some boards of corporate Malaysia that place greater importance on qualitative issues and so the calls of including qualitative metrics have been made.

In addition, some identified themes provided new empirical evidence which represents news issues surrounding the use of qualitative metrics in CEO performance evaluation. For instance, the importance of KPIs weightage in the determination of KPIs which indicated that in most cases the variable reward of the CEO is mainly determined based on KPIs weightage. Also, the findings indicated that the KPIs change only after the revision of the strategic plan or unexpected changes in the environment, but the weightage given to quantitative and qualitative KPIs could be changed on a yearly basis depending on the emphasis of the business. Also, the findings introduced the concept the shared KPIs which are normally cascaded down from the CEO to every employee in the company and the findings showed that shared KPIs are always quantitative KPIs.



Additionally, the study identified several factors which influence directors’ use of qualitative metrics throughout the process of CEO performance such as sustainability, ethics and values, corporate attributes, and individual attributes. Also, this study has modified the construct of the use of qualitative metrics in CEO performance evaluation to include new characteristics such as the weightage of qualitative metrics in CEO’s KPIs template and adherence to CEO’s KPIs template.

Conclusion The study attempted to describe board members’ use of qualitative metrics in CEO

performance. This study was conducted in the view of the new changes, hoping to learn whether the shift of business philosophy and new requirement of the Malaysian Code of Corporate Governance MCCG 2012 has been brought into board decision making practices regarding the use of qualitative metrics in CEO performance evaluation. Some changes of board decision making practices in the evaluation of CEO performance process were expected. In particular, it was expected that boards would evaluate CEOs performance primarily based on qualitative metrics in CEO performance evaluation.

The findings indicated that directors evaluate CEO performance mainly based on quantitative measures, still assume the main strategic objective of the company is shareholder value maximization. Therefore, at first glance, the findings show that most directors still believe profit is the main purpose of business and even if they have included stakeholders in the company’s corporate governance framework is only to ensure sustainable shareholder value.

However, as the findings of the interviews also showed that some members of the board assign higher weightage to qualitative metrics and some board members place more importance on qualitative metrics in the actual performance evaluation, even though quantitative metrics received higher weightage which indicates that qualitative metrics play more important role than quantitative metrics in the actual evaluation of CEO performance.

This suggests that some members evaluate their CEOs primarily based on qualitative measures. Also, the findings proposed some factors associated with the use of qualitative metrics in CEO performance evaluation such as sustainability, ethics and values, corporate attributes, individual attributes. The findings suggest that agency theory and stakeholder theory are not accurate theories in explaining board members’ actual behaviors and practices regarding the use of qualitative metrics in CEO performance evaluation and compensation because of their limited predictions.

However, the findings show that the dominance of quantitative metrics in CEO performance evaluation is due to several reasons. For instance, the company by definition is based on a very basic accounting equation which is (Asset – Liabilities = Equity). Therefore, quantitative metrics would become very important because the equity represents the funds to the company and the source of budget and without it boards cannot serve stakeholders even if they wanted to do so. Second, the simplicity, popularity (e.g. shared KPIs), and availability of quantitative metrics also could be a reason of dominating CEO performance evaluation because usually qualitative metrics require the use of 360 degree evaluations which requires more efforts by directors.

Therefore, computerized accounting information systems should be developed to provide timely information relevant to qualitative metrics to facilitate the use of qualitative metrics in CEO performance evaluation, so that probably in the future we can see shared KPIs which are non-quantitative. Additionally, it could be because of the compensation plans design which



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is divided into fixed compensation which represents 70% of CEOs compensation and variable compensation represents 30% and most BODs assign higher weightage to quantitative KPIs usually 70%. Based on these percentages, the importance of qualitative metrics is diminished and if the CEO only achieves their quantitative targets, the CEO would get almost 91% of his compensation. This could be another reason why directors evaluate CEO performance primarily based on quantitative measures. Therefore, compensation plan designs should redistribute the weightage that is assigned to the fixed and variable compensation, to increase the weightage of the variable compensation to 70%, for example, so that BOD members and CEOs would focus more on qualitative metrics because in this case qualitative metrics would determine most of the compensation.

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Management and Governance, 15, 311-25.

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Figu

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Author’s Profile

Rezgalla Abdalla, Lecturer at Faculty of Economics, Omar Almoktar University, Albayda, Libya has 13 years of teaching experience. During his tenure he has taught core accounting courses. His areas of interests are Corporate Governance, Performance Evaluation, and International Financial Reporting Standards.

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