Why Nonprofit Boards Should Have Employment Contracts with their CEO. Retaining Key Executives During the “Great Resignation”​Episode 2- The Term

Employment contracts are communications between the Board and the CEO. They describe facts, amounts, consequences, conditions, and time periods. They can also convey sentiments – to wit, an expression by the board of its appreciation for and desire to retain their CEO. One aspect of this admiration or desire is expressed in the Term.

The Term is the length of the contract – three years, five years. But remember, and this is quite important, the years are not necessarily the amount of time the board is committed to paying the CEO because the board can always fire the CEO (for a cause or no reason), so the actual financial commitment is determined by the amount of severance (six months, nine months, a year, or perhaps, no severance). But if the board can fire the CEO at any time, why have a Term?

The Term describes when the relationship ends, but more importantly, it determines when both sides commit to extending the Term or not. Typically, within 12 months to 6 months before the end of the Term, there will be a time for each side to formally decide to continue, to renegotiate different elements of the contract, or to let the contract expire. When this renegotiating clause is missing, contracts tend to end with neither side acting nor even noticing. Boards need to understand the Term to plan for succession; CEOs need to have a term to prepare for their future.

Recently, because of the Great Resignation, boards are approaching me to assist in reopening and extending the CEO contract for fear of losing the CEO to another organization. And because many nonprofit CEOs are nearing retirement and don’t want to be looking for another job in their late sixties, they too are seeking a new, longer-Term contract. For example, one CEO with two years left on her contract but planning on working for another five, wanted to extend the contract or negotiate a new, extended agreement so that she would not find herself at age 65 or 67 back on the market. Likewise, boards cognizant of the tight job market, with only two years remaining on the CEO contract, have requested reopening and offering a new, longer-term contract.

But if an employee can always leave an organization and a board can fire a CEO at any time, why have a contract? Because of the intangible value. A contract communicates the board’s intention to retain the CEO, and likewise, a signed contract is a formal way for the CEO to express a desire to remain with the organization. Particularly during this time of changing relationships between employee and employer, in this time of roiling job markets, during the Great Resignation, the more communication the better.
Next episode. Beyond the Term, how else can a contract help retain a CEO or senior executive?

*For over 25 years, I have worked with compensation and executive committees of boards of nonprofit organizations helping with best practices, CEO contracts, supporting them when the press questions their CEO compensation, and providing comparability studies and ‘safe harbor’ against IRS Intermediate Sanctions. I also serve as an expert witness in cases involving nonprofit compensation. However, I am not an attorney and the above should not be construed as legal advice.