The Seven Reasons Why Nonprofit Boards Must Have an Employment Contract with their CEO

Episode One: Severance

Many of my clients, boards of nonprofit organizations, often object when I suggest offering their CEO an employment contract. Their responses are some variations on: “we’ve never had a contract,” or, “we trust each other, there is no need for a contract” or, “why offer an employment contract, it only favors the employee, not us, the organization.”

And for sitting CEOs without contracts, or, more likely, CEOs working with an expired employment agreement, their responses range from “my board loves me and treats me well, I don’t need a contract,” or, more usually, “we’ve never gotten around to renew since it expired, I get raises and bonuses each year, so it doesn’t matter.”

I am here to say that yes, it really does matter – for the board and the executive of a nonprofit organization. First, let’s clarify – somewhere in the organization, there must be something written describing what the CEO’s salary is supposed to be, the benefits, and when and if a bonus is awarded. While not a formal employment agreement, it is something “official” and written describing these terms.

Episode 1. The Severance Agreement

Severance describes how the relationship ends and who owes what to whom when it does. The board needs to have a severance agreement with the CEO. If both the board and the CEO agree, in advance, that the board can terminate the agreement for “no reason” at any time, if there is an agreement in advance to what the board will pay for that right (6 month’s salary, for example), then it would be more difficult for a CEO to contest the board’s decision in court. Boards should always have this “right,” and by agreeing in advance for this right, they could avoid more costly severance or even more costly lawsuits and delays in severing the relationship. If others in the organization have been severed (fired) and received severance payments without other precedents or written understanding, the amount of severance is a matter of negotiation. Severance agreements, like prenuptial agreements, are easier to agree to when everyone loves everyone, so it’s a good time to decide and work together. But if the time for a separation arrives, it is beneficial for all to have agreed in advance.

With “For No Reason” severance agreements, the terms can be complicated: the amount of severance, the conditions, whether the employee has the opportunity to “remedy the issue concerning the board,” and many other terms are essential to memorialize, but the basic principle is simple; a severance agreement allowing the board to sever employment is like an insurance policy and best to be agreed to upfront.

There are other kinds of separation – some seem simple but are best articulated; – if the CEO dies or is disabled; after what period of the time can the employment be terminated and under what conditions?

The last category of severance, which few employees are aware of, is “for good reason.” This form of severance is vital for the employee and beneficial to the organization. What if the organization doesn’t review the CEO’s performance, award a bonus as promised, cuts the CEO’s salary unilaterally, or demotes but doesn’t fire the CEO. In those instances, what is a CEO to do? Complain, quit? There are few options without the “for good reason” clause, a kind of reverse “for cause,” citing conditions when the CEO may quit and collect a severance.
As with “for no reason,” the terms usually include a period forcing both sides to communicate a grievance or concern before termination.

Stay tuned for Episode 2. In this time of the Great Resignation and when the demand for CEOs far exceeds the supply, what can a board contractually accomplish to attract and retain a talented CEO?

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