When targets are defined, the Board must set specific KPIs or other agreed performance measures for the company and for the CEO, monitor regularly (at least quarterly) how management is performing against the set KPIs, and take the necessary measures if performance is not satisfactory. The more often the Board monitors performance, the more opportunities it will have during the year to take the measures needed to adjust operations and drive the company to better results.
KPIs should be both financial and non-financial (e.g. related to ESG and sustainability). It is not obligatory to set the same KPIs for the CEO as for the company. The CEO could have additional (e.g. “soft”) KPIs related to organisational culture and the well-being and satisfaction of employees.
It is good practice not to set too many KPIs. With more than 10 KPIs, the weight of a single KPI will be less than 10 per cent, and the motivation to achieve it may be weak.
KPIs should be defined very clearly and understandably, in order to avoid discussions after the year end about whether or not they have been achieved.
It is good practice to use the SMART concept when setting KPIs. Some companies use the SMARTER concept (specific, meaningful, achievable, relevant, time-bound, evaluate and readjust).
A budget sets out the income and expenses planned for the company. The budget should be challenging enough on both the income and the expense side. This gives management a sense of urgency, makes them continually search for the best and most innovative solutions and the most efficient way of operating, and keeps the company highly competitive. All these measures help to ensure that the value created is maximised.
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