Discussing an employment contract between the board and the prospective or current CEO involves both business and emotional elements. When conversations address compensation and value, personal perspectives are often involved. The prospective CEO may question whether their worth is being fully acknowledged and whether protections such as severance are being adequately considered based on their experience and tenure. Retaining an objective third-party, such as a compensation consultant, supports both the negotiation process and the maintenance of positive relationships between involved parties by minimizing the influence of personal emotions.
Contract negotiations for nonprofit positions must be cognizant of sensitivities around executive pay, for reasons of equity and legal implications. CEOs earn more than the rank and file, and though the board doesn’t set the rank-and-file salary, equity should be their concern. However, the competition for top-talent leadership in the sector continues to increase, driving up total compensation. And see below for the board’s legal considerations. My approach is to first provide the board with the facts: what are the going rates, what are the comparables, and what are the trends in the field. It’s important to justify compensation; eventually, the information becomes public. So, a comparable analysis, plus information on best practices regarding severance, vacation, benefits, and other matters, becomes valuable in negotiations.
Intermediate Sanctions are IRS penalties if the nonprofit executive team’s pay is unfair or unreasonable and can’t be justified. An independent consultant’s written verification, based on comparables, creates a “safe harbor.” Though rarely imposed, these penalties can personally affect both the board and the executive.
There are circumstances, particularly during contract renewal, in which trust has been established among the board, the CEO, and James. In these situations, he facilitates an agreement that provides value to the CEO, is demonstrably fair to the board, and can help the organization retain its leadership.
There is no way to prevent a CEO from breaking a contract; even options like noncompete clauses are less enforceable today. In light of this, certain retirement vehicles can help a CEO defer taxes for a period, provided they remain employed with the organization for a specified period. These vehicles provide an incentive for the CEO to remain in position for the duration of the agreed period.
Benchmarking data is helpful, but the data must be completely relevant. Comparing CEO compensation for a visitor-driven organization uses a different set of comparable organizations than those for foundations, social service organizations, or organizations that spend significant amounts of capital on new exhibitions or buildings. Finding the correct comparables and then using actual data. We have data from other clients and proprietary studies, and we can update it using appropriate indexing.
