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Employment Agreements: Five Things Every Nonprofit Board Should Know

Posted by Anne Wallestad, President & CEO, BoardSource on Jun 16, 2015 2:56:44 PM

Employment contractBy Anne Wallestad, president & CEO, BoardSource

This morning, I had an opportunity to sit in on a session hosted by CEO Update, which focused on the ins and outs of CEO contracts and compensation. The panel included four experts in CEO recruitment, compensation, and contracts, including Brian Vogel, who is senior principal with Quatt Associates and co-author of BoardSource’s book, Nonprofit Executive Compensation: Planning, Performance, and Pay.

Each of the experts had tremendous experience working with both boards and CEOs on the art and science of employment negotiation and agreements. And while the session was primarily focused on professional and trade associations, many of the points that they shared are applicable more broadly. This includes situations where agreements between boards and CEOs are not necessarily memorialized in an employment contract, which is the majority of most 501(c)(3) organizations, according to a 2013 study by The Nonprofit Times.

So, in the interest of sharing their good insights with all of you, here are the five things I think it’s most important for nonprofit boards to keep in mind:

  1. It’s about getting the best candidate, not the best deal: Each of the experts cautioned that boards should be focused on getting the right candidate to lead their organization and — to do so — they need to be prepared to compensate him or her fairly. Of course, there are boundaries that boards need to keep in mind, and the experts reinforced that boards should benchmark compensation against similar organizations to ensure that they are not putting the organization at risk in terms of intermediate sanctions. But boards that are hyper-focused on keeping CEO compensation as low as possible need to understand that they may end up getting exactly what they pay for.
  2. Establishing a common language around expectations is key: One of the big benefits of a formal employment agreement is that it establishes a common language and understanding of expectations. According to the experts, it’s not about mapping out all of the specific performance objectives or goals, but it is about identifying the process by which those goals will be established and reviewed. This is an especially important point for an incoming CEO, given the context that 17 percent of boards aren’t regularly assessing CEO performance, according to BoardSource’s report, Leading with Intent. Helping to map out how performance (and compensation) will be managed over the CEO’s tenure is a very important step in ensuring that the board is holding itself accountable to its role of managing and supporting the CEO, and communicating that commitment to him or her.
  3. When it comes to negotiations, you’re a board, not a boss: Unlike other positions within organizations or companies, the CEO reports to the board as a whole, rather than to one individual, and boards (especially board chairs) can get themselves into trouble when they forget that. The panel referenced horror stories about what happens when board chairs or a small group of board members negotiate with a candidate or CEO in a way that is not inclusive of — or empowered by — the full board. Whether it’s an initial offer of employment or a renegotiation of salary and terms, it’s essential that the full board be informed and comfortable with the employment agreement and compensation of the CEO, and has memorialized that in some way.
  4. Creating consistency across board change is important (especially to incoming CEOs): Another unique aspect of reporting to a board is the fact that the board can change radically as its composition changes, and that can happen as often as annually. For many organizations, this upheaval is smoothed through thoughtful recruitment and staggering of board terms, but — in some organizations — CEOs can literally face a brand new board all at once. In organizations that have board structures that don’t prevent this sudden change in board composition, the employment contract or agreement plays a critical role in ensuring that what one board commits to, a future board doesn’t renege on. Or, similarly, if a new board sees challenges with performance or fit that a previous board didn’t, there is some mechanism for managing the terms of an abrupt dismissal. It’s not difficult to see why both of these situations would make a CEO skittish, and why he or she might be uncomfortable accepting a position without some protections against quick and radical shifts in board thinking.
  5. You want to start your partnership in a good place: The experts at today’s session likened the recruitment and negotiation process for a nonprofit CEO to personal relationships and marriage. The recruitment process is courtship, the employment contract (if there is one) is the pre-nup, the onboarding is the marriage…you get the picture. And — as many CEOs and boards learn — some “marriages” end in divorce, rather than “happily ever after.” But the experts cautioned that CEOs and boards that focus too much on how a relationship might end, risk dooming the relationship from the start. Expectation-setting is one thing (and it’s essential), but being overly adversarial or confrontational isn’t the way to launch a constructive partnership.

Ultimately, that final point is probably the most important one. The entire recruitment and hiring process is about bringing on a CEO who will partner with the board to lead your organization toward the best possible outcomes for your mission. The hiring process should reflect the way that you will work together — with respect, clarity, and candor, and a focus on the organization’s mission.

For more on the board’s role in hiring and supporting a new CEO, check out these BoardSource resources:

Topics: Board Best Practices


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