It is easiest to measure a CEO's capital allocation skill. In fact, financial measures are the ones made public, earnings and share price. But how can a CEO link those to his/her ACTUAL DECISIONS? Working with his/her CFO, a CEO can devise financial measures appropriate to his/her business. Sometimes traditional measures are most appropriate, such as economic value ADDED or return on assets (for a capital-intensive company). Other times, the CEO may want to invent business-specific measures, such as return on training dollars, for a company which values state of the art training for employees. By monitoring several such measures, a CEO learns to link his/her budget decisions with company outcomes. Ultimately, the CEO's should be creating more than a dollar of value for every dollar INVESTED in the company. Otherwise, his/her best BET is to return cash to the shareholders for them to invest in more productive vehicles.

It is easiest to measure a CEO's capital allocation skill. In fact, financial measures are the ones made public, earnings and share price. But how can a CEO link those to his/her actual decisions? Working with his/her CFO, a CEO can devise financial measures appropriate to his/her business. Sometimes traditional measures are most appropriate, such as economic value added or return on assets (for a capital-intensive company). Other times, the CEO may want to invent business-specific measures, such as return on training dollars, for a company which values state of the art training for employees. By monitoring several such measures, a CEO learns to link his/her budget decisions with company outcomes. Ultimately, the CEO's should be creating more than a dollar of value for every dollar invested in the company. Otherwise, his/her best bet is to return cash to the shareholders for them to invest in more productive vehicles.