Nonprofit Musings

Should Executive Directors Serve On Their Own Boards?

There is one aspect of governance where non-profit organizations are way ahead of their counterparts in the private sector:  in most cases, the board is chaired by someone other than the chief executive.  While there is considerable debate on this practice in the private sector, my view is that separating the powers between the CEO and board chair is highly effective in strengthening governance. 

Some commentators on nonprofit governance argue also that the chief executive should not be a voting member of the board.  Their argument is essentially that full separation between trustees and management strengthens governance. 

I was on this side of the argument until a few years ago.   At a conference on improving nonprofit governance, arranged by Senator Chuck Grassley, the topic of CEO participation on the board came up.  Amidst arguments on both side of the issue, Pat McGuire – President of Trinity University in Washington D.C. – told a story that powerfully demonstrated the value of full board membership.  “Last year,” she said, “our board decided that we were going to have to make some deep staff cuts.  This was tough news for our campus, and it was far better for me to be able to say that we decided to make these cuts, rather than to say that they decided.” 

As full board members, executive directors have only one vote, hardly enough to turn the tables on important decisions.  There are times – such as setting their own compensation – when executive directors need to be excused from the discussion and the voting.  But having a full voice on the board is much more likely to strengthen both their credibility outside the board room and the deliberations inside the room, than to cause any governance problems or conflicts.

A Different Take on Nonprofit Pay

In a recent post, Dan Pallotta makes an interesting argument about non-profit pay.  It's well worth reading.  The blog is here:  The "Psychic Benefits" of Nonprofit Work Are Overrated.  

Good Effort But Misleading Results: the Chronicle's Pay Survey

The Chronicle of Philanthropy has just released the results of its 2009 CEO pay survey (for the full article, click here: Chronicle Survey).   While the Chronicle researchers have made reasonable efforts to upgrade the quality of their reporting, the survey is misleading in some important respects.

The biggest problem is a confusion of years.  The headline says that median CEO compensation rose by 7% in 2008, when in fact the majority of their data is no more current than June 2008, and data from 22% of the 325 respondents is from 2007.  For most people, the impact of the current recession did not really become clear until mid-2008 (the Dow Jones average was above 12,000 on 6/30/08).  So few nonprofits would have been slowing down or eliminating normal annual salary increases during the period for which the Chronicle survey measures salary growth.

Yet in their cover story, the Chronicle states that “the large increase in compensation for nonprofit leaders is especially noteworthy considering the sharp drop in pay earned by for-profit executives” and cites an Equilar study to support this claim.  But the Equilar study covers the full year 2008, which ended with the Dow Jones average at 8,776, down 27% from the June 30 level.  Many corporations’ fiscal years are also calendar years; much of corporate executive compensation comes in the form of stock grants, which of course were not producing expected gains by year-end 2008.  So the Chronicle is trying to compare nonprofit compensation increases given during a period of at least apparent economic prosperity with for-profit reductions occurring during a sharp, deep recession.  This is hardly fair.

As further evidence of the Chronicle’s bias, they claim that inflation during the period of nonprofit increases was “virtually nonexistent”. The majority of these raises (median of 7%) were given between July 1, 2007 and June 30, 2008, during which period the consumer price index rose by 5%. 

In some respects, this survey is done better than others recently published.  For example, the researchers excluded from the comparisons employees whose compensation was inflated due to a one-time payment, such as severance or a pension payout.  They worked to achieve a representative sample, bringing in organizations who didn’t make their size parameters in under-represented areas.  And while I’m not certain of this, they apparently limited the sample only to organizations whose full data was available for both years. 

Further, much of their commentary focused on a supplementary survey seeking information on whether nonprofits were freezing or reducing pay this year.  Reading the entire article, you do get a fairly good picture of what’s going on with nonprofit executive compensation today.

But this survey again demonstrates the problem with combining research with news.  The coverage is more interesting when there are things to criticize – note the photos of 5 well paid executives on page 11 (and Jeff Raikes of the Gates Foundation on page 1) contrasted with the three who took pay cuts shown on page 12.  The media should focus on unbiased reporting, and leave compensation surveying to the experts.

Charity Navigator Compensation Survey Update

I just had a productive phone conversation with Ken Berger, Charity Navigator's CEO.

Following my recent post on some issues with their CEO Compensation Survey, Charity Navigator has amended its publication to clarify that some of the compensation reported, such as that for the President of the University of Delaware, includes cash payouts of deferred compensation and not just salary or other annual compensation.  This is an important improvement in the accuracy of the study.

Charity Navigator is also reviewing its compensation survey procedures and is considering implementing diagnostic procedures to prevent potential inaccuracies in the year-to-year CEO compensation comparisons  

Mr. Berger is clearly interested in further strengthening the metrics with which Charity Navigator assesses nonprofit organizations and reports its research findings.  This is encouraging.  

How much is too much? Assessing nonprofit executive pay.

High compensation for nonprofit leaders, such as the recently reported $1 million pay for Michael Govan, Executive Director of the Los Angeles County Art Museum, often creates a outcry for federal limits on nonprofit executive compensation.  The concern is understandable, but much that’s been written about this is off the mark.

Critics objecting to high levels of nonprofit compensation often hold one or more of the following views:

1. Pay for leaders in nonprofits should be reasonable in terms of competitive levels for similar nonprofit executives,  and the expectations of donors and funders of charitable organizations.   As such, they should almost always be below those paid in the private sector.
2. Pay for nonprofit leaders should be less than some arbitrary standard, such as the salary of the President of the United States.
3. Nonprofit leaders should work primarily for the psychic income of fulfilling important missions; compensation should not be an important factor in recruiting or retaining leaders.
4. The world is full of competent leaders who would work in nonprofit positions for compensation that critics deem reasonable.

The article’s main theses are:

• Except for the first point above, with which I fully agree, most critics of high nonprofit compensation don’t have a good understanding of the dynamics of nonprofit leadership or of the pay required to attract and retain top talent.
• Setting an arbitrary standard to limit nonprofit executive compensation would be a mistake, with damaging unintended consequences.
• Existing controls – board oversight, the threat of fines and sanctions, and public review -- provide sufficient control of nonprofit compensation, even at the top.  But these controls could be strengthened.

This post will attempt to deal with these issues.  It's a long post, so you may want to read it in segments, or you can print a pdf version by going here.  

Managing Nonprofits Can Be Highly Complex

Imagine you are the CEO of a YMCA in a major metropolitan area.  You are responsible every day for hundreds of children in dozens of locations; you need to structure operations and supervision so that none of them are lost or injured or abducted or drowned.  This is in addition the normal responsibilities of ensuring financial health, raising funds, coordinating with city and state authorities, developing and motivating staff, etc.  Few for-profit positions have a similar level of complexity and risk.

The same can be said of presidents of universities, who must combine significant fund-raising expertise with sufficient diplomacy to influence diverse constituencies (faculty, students, alumnae, trustees) to uphold and improve educational excellence.  Ditto for hospital CEO’s, with their financial and regulatory imperatives and diverse constituencies.

Leaders of these organizations and many other types of nonprofits are responsible for much more than revenues and profits – they nurture individual growth and development, heal and comfort the sick, shelter the homeless, protect the battered, and in hundreds of other ways improve our communities.  Yes, almost all of them are willing to do this for less pay than their jobs would be worth in the private sector.  But that does not mean that their pay should be limited to some arbitrary number.

Good Leadership Makes a Difference

One thing I have noticed in my nonprofit work is that there are usually four to five organizations that are considered the leaders in each city’s nonprofit sector and that these leaders vary considerably by type of service provided.  In city A the top charities might include a foundation or museum, in city B it may include the Girl Scouts or an animal welfare charity, in city C it may include a hospital or a homeless shelter or a zoo.

Whether a cause or result of their success, these top charities almost always attract a high level of contributions.  Community leaders want to serve on their boards, where doing so is a badge of honor and acceptance.  These charities usually do a good job of measuring outcomes clearly; they have a strong track record of success; they are financially stable. 

These charities are not the community leaders just because of what they do – there are always equally worthy charities not in the leadership group.  Sometimes their leadership results from a significant economic windfall – the Marin Community Foundation comes to mind.  But almost always, somewhere during the organization’s growth, an inspirational, highly effective leader brought its performance to a level where it’s achievement and value became clearly apparent to the most important and influential individuals in the community.  And their involvement – encouraged by this leader – contributed exponentially to its success.

Now let’s assume you are a trustee of a nonprofit looking for a new leader and you want someone with the potential to build the organization to one of the premier nonprofits in your community.  Or to turn around an organization in trouble.  Or to greatly enhance the organization’s ability to achieve its mission.  The pool of potential candidates includes existing executive directors, nonprofit managers just below the ED level, and for-profit executives, either active or recently retired.   Any of these candidates could be independently wealthy, willing to work for little or even no compensation.  

But why limit your search to those willing to accept below fair pay?  The candidate pool undoubtedly includes qualified people with children in college or other financial needs, without independent financial resources, for whom a decent salary is very important.   The best leaders may come from this pool.

Why capping pay is wrong

For most nonprofits, the type of caps being proposed is immaterial – few pay their top people close to $400,000 or $500,000.  But for the small percentage of nonprofits who do pay this level of compensation, caps would create serious problems. 

First, any pay limit set by the IRS on Congress other governing body would be arbitrary.  The most common suggestions are limiting nonprofit executive pay to the salary of the President of the U.S. (currently $400,000) or the $500,000 base salary limit being applied by the Treasury Department to organizations receiving government funding under the TARP program.  But neither of these numbers reflect the value of the work being performed – they are just politically expedient numbers the public can more readily accept.

Second, any cap would undoubtedly be unfair to nonprofit executives whose scope of responsibilities genuinely reflect greater value than the cap itself.  Limiting pay for university investment professionals or basketball coaches or heads of cardiology in medical schools to $400,000 or $500,000 would result in a unsustainable gap between what they can make in the private sector and what nonprofits could pay.

Third, it is likely that a pay cap would lead larger nonprofits to look for other ways to compensate their top people, through expanded benefits, or added time off, or job sharing, or special fees, in order to keep their best talent.  The government might try to preclude this through legislation beyond the pay cap, but such legislation would be very complex and costly to administer. 

Fourth, the pay cap could actually result in higher compensation for leaders of smaller nonprofits – those below the pay cap.  Even $150,000 or $200,000 is higher compensation than the vast majority of nonprofits should be paying their executive directors today – most charities are very small.   Providing an official ceiling of $400,000 or $500,000 could put pressure on trustees to raise executive compensation more quickly than they would do absent the cap.

Finally, in the largest nonprofits, a pay cap could cause salary compression, with many executives earning close to the cap even though their responsibilities are substantially less than those of the CEO, creating serious inequities in the compensation structure.

There is a Solution

You won’t get rid of excessive pay entirely in nonprofits, no more than in any other sector.  But there are good steps that can be taken to lessen the incidence of egregious pay.

First, the IRS should use existing sanctions more forcefully.  These sanctions (commonly called the “intermediate sanctions”) enable the IRS to fine trustees and tax executives in cases of egregious excess compensation.  But these sanctions apparently are rarely used.  They may be saddled by budget constraints, but I think the IRS should be more aggressive going after apparently excessive compensation.

Further support should come from publications such as the Chronicle of Philanthropy or the Chronicle of Higher Education, and organizations such as the Independent Sector or Charity Navigator.  Some of these organizations may be reluctant to bite the hands that feed them, but as the Chronicle of Philanthropy has shown, pointing out specific cases of potential abuse can create change. 

Most important, the Boards of Trustees should do their homework with a thorough periodic review of top officer compensation.  This review should address these questions:

§  Does the organization have a compensation policy, and if so what is the intended position of the organization’s compensation against the peer groups to which it will be compared?  If the intended position is above average (e.g., 75^th percentile), is this strategy supported by the organization’s size and complexity and/or the background, experience, and performance of the executives being reviewed?

§  Is the peer group against which the organization being compared truly representative, in terms of size, mission, scope, and geography? 

§  How does the top executive’s market position compare to that of other executives and employees in the organization?  If the CEO is the only executive at the 75^th percentile while everyone else is at or below average, is there a clear justification for the difference?

§  How transparent is the entire compensation package?  Are there special benefits or perquisites that apply only to the top officer, and if so is there a justification for this?  Will this justification stand up to public scrutiny?

With strong board oversight, a stronger and more active IRS, and aggressive publicity about questionable compensation, we can strengthen nonprofit compensation generally and reduce the incidents of abuse.

Pete Smith is the President of Smith Consulting.  The former CEO of Watson Wyatt Worldwide, he now provides executive compensation consulting services to the nonprofit community.

A Biased View from the Other Side

A friend recently brought to my attention Dean Zerbe’s article in the Winter 2008 issue of the Nonprofit Quarterly, entitled “Weasels on the March:  The Struggle for Accountability in an Indifferent Sector.”   It’s a disturbing rant against nonprofits.

Zerbe is the former senior counsel and tax counsel to Senator Grassley, whose focus on egregious nonprofits has helped to promote ethics in the sector.  I worked with Zerbe on the ethics issues surrounding the Smithsonian Institution and American University and found him to be energetic, quick witted, and strongly committed to doing things right.

But now Zerbe has gone to the other side – he is National Managing Director for Alliant Group, where his mission is “to make sure our clients know how to take advantage of every tax incentive that the government makes available.”  From this perch, he’s decided that charities are infested with “weasels” – sector leaders are “sheepish,” executives lead “champagne lifestyles,” charity boards “don’t show up (or never meet),” and that nonprofit lawyers “act as enablers, informing a charity that whatever flim-flam action it wants to take is legal.”

There is a strong implication here that the nonprofit sector is more replete with weasels than, say the corporate sector.  Well, what about Enron?  Or Congress.  What about William Jefferson?  Or lobbyists.  What about Jack Abramoff?  There is some greed in every sector and to assume that charities will be free of sin is just naïve. 

Zerbe also says that “the charitable sector is wholly incapable of calling out the weasels in its own community.”  This is the thrust of Zerbe’s argument:  he wants the sector to improve its ability to ferret out wrongdoers (weasel/ferret pun unintended).  This is nice in theory, but in practice no sector does much weeding of its own miscreants.  Enron’s troubles weren’t discovered by an organization formed by other corporations to find bad ones; Congress didn’t discover Jefferson’s criminality on its own; and other lobbyists weren’t responsible for discovering Abramoff’s scandal.  All of these problems came to light from sources other than the sectors with which they are associated.

It’s understandable that someone dealing primarily with excesses and scandals in the nonprofit sector, as Zerbe was during his time on Capitol Hill, would develop a jaundiced view.  But to extend this view across the sector is to do a disservice to the many good trustees, executives and advisers who for the most part provide excellent, unselfish service for the good of the community. 

Checking out Checkpoint

I’ve now had the opportunity to evaluate GuideStar’s new “CEO Compensation Checkpoint” service, which GuideStar markets as “the first step toward meeting the IRS requirements for ensuring fair and reasonable pay and benefits.”  It’s good. 

The CEO Compensation Checkpoint process is clear and simple.  You provide GuideStar with your organization’s name and EIN number; they run a process to ensure that there will be a valid peer group in their data base; if there is, they then ask for payment ($700) and produce a ten-page report comparing your CEO’s compensation over the prior three years to that of the peer group.

Using a nonprofit client as a guinea pig – a West Coast animal welfare organization – I ordered the service from GuideStar this week.  Signing up for the service was easy; communications were excellent; and it took only four days from my first request to receipt of the report.   All of this is done online, with the report sent in pdf format.

The report is well organized.  The first few pages are introductory boilerplate, including a summary by attorney Karl Emerson of the process for complying with the IRS regulations concerning fair and reasonable compensation.  This is followed by graphic and numerical displays of your CEO’s compensation compared to the peer group medians and percentiles (25th and 75th) for the prior three years.  The final pages include a chart on the annual percentage change in chief executive total compensation for the previous two years and general guidelines on how to use the information in the report.

The most impressive aspect of GuideStar’s work was the strength of their comparative data base.  Their process identified six comparable nonprofits as a peer group; all have revenues within 25% of my client’s revenues; all are animal welfare organizations located in major metropolitan areas; there even seems to be a geographic slant, since all are located west of the Mississippi.

There are some problems with this report, however:

• One of the peer organizations hired a new CEO in the second of the three years measured, at a salary almost twice that of the prior CEO.  This distorts the salary increase comparisons, as calculated by GuideStar.
  
• The individual CEO data reported in the 990 forms for nonprofits in the peer group shows that there are two pay patterns in these six organizations – three pay relatively low and three relatively high.  Therefore the data points – means, medians, and percentiles – are not really indicative of pay practices in this group.  Anyone assessing reasonable compensation for the organization being compared would need to first determine which of these two sub-groups represented the right comparison – which were well run, which CEO’s had similar experience, etc.
• The impact of geography on compensation is not considered.  Living costs are very different in the six cities in the peer group, and the report does not reflect the materially higher compensation generally paid in San Francisco, even at the executive level.
• The data does not appear to be aged, meaning that the average compensation reported in any one year is probably somewhat understated.

That said, the CEO Compensation Checkpoint is in my view a valuable service that will of use to many nonprofits, especially smaller ones without the resources to do the research themselves.  The report does not provide a reasonableness opinion and does not take into account length of service, performance, marketability, and other factors that affect such opinions.  But it is a good vehicle either as a starting point for boards to use in working towards a reasonableness opinion, or to serve as the opinion for organizations where the peer group is clearly the right one and the CEO’s compensation is right in the middle.

Pete Smith is the President of Smith Consulting.  The former President and CEO of Watson Wyatt Worldwide, he now consults on executive compensation, primarily with nonprofits.  More information is at www.petesmithconsulting.com.

A Cautionary Note About Compensation Surveys

Charity Navigator has just come out with its 2009 CEO Compensation Study, a finely printed document that summarizes CEO compensation by nonprofit size, region, and category, but that unfortunately includes some misleading information and muckraking. 

The full survey can be found at 2009 Charity Navigator CEO Compensation Study.

What’s particularly misleading in this survey is the information on CEO salary increases, which Charity Navigator says was 6.1% greater than the previous year.  There are four reasons this number is wrong.  First, the survey is comparing slightly different groups of charities, not exactly the same charities from one year to the next.  Second, the survey does not exclude charities that hired new CEO’s during the year, or CEO’s who worked only part of a year, further clouding the data.  Third, the survey does not exclude organizations led by different CEO’s in the two years in question.  And finally, while the survey claims that it is measuring only cash compensation, it is well known that the 990 reporting in this column is inconsistent, and that benefits such as supplemental retirement income are sometimes included in the cash column, potentially skewing the data materially.

Since the full survey includes 5,448 organizations in Charity Navigator’s data base, these problems are diminished for the total sample – but the regional comparisons are suspect.  Based on my experience with surveys and many nonprofit clients, I would expect a more carefully done survey to report average CEO salary increases of 4.5% to 5.0% during the 2007-2008 period (which the survey covers).   And I expect that this percentage will drop in the current year, given the tough economy.   So think twice if you’re planning to use this survey to tell your board you deserve a 6% increase this year.

My greater concern about the Charity Navigator survey is its bias towards identifying egregious compensation.  Of course every survey has its purpose, and the more this survey can support Charity Navigator’s claim to be experts in mining data to point out abuses, the better for them.  But in this study, their statisticians have proved blatantly inept.

For example, the survey shows the President of the University of Delaware’s compensation in two places:  in the “Biggest Paychecks” section under the Education category, and later at the top of the list of the highest paid CEO’s.  The figure shown in both tables is $2,377,100. 

Now clearly this is a high salary for a university president.  The problem is that this number is not President David Roselle’s salary, a fact I discovered with about five minutes of checking the university’s IRS 990 forms – the same form from which Charity Navigator got its information. 

From its most recent form (for the period ending 12/31/07), it is clear that Mr. Roselle retired in 2007, meaning that much of the $2.4 million compensation reported must have been some sort of deferred compensation that vested over time but was reported in the year retired as paid.  This is even clearer when looking at the compensation of the incoming President, Patrick Harker, reported in the 990 form as $450,000.  Whether this is Mr. Harker’s full annual salary or a pro-rated portion of larger salary is not clear, but it is clear that the University of Delaware is not paying a salary of over $2 million per year for its President, as Charity Navigator claims. 

This would have been patently clear if someone at Charity Navigator also took a brief look at the University of Delaware’s prior year’s 990 form. There, Mr. Roselle’s cash compensation was reported as $629,00 – not at all unreasonable for a seasoned CEO of a large university – and further proof that the 2007 figure was an anomaly. 

If you think this is bad in print, go here: Ken Berger Fox News Interview to listen to Charity Navigator’s CEO, Ken Berger, misleading Fox Business News about overpaid CEO’s. 

Yes, there are grossly overpaid CEO’s in any sector, including nonprofits.  And yes, Charity Navigator could emerge as a strong and useful watchdog.  But to do so, they will have to strengthen their research processes considerably and avoid reckless headlines. 

Note:  GuideStar has just come out with a new service assessing reasonable compensation, the “CEO Compensation Checkpoint.” This has potential to be a very useful service and I will be reviewing it in an upcoming blog.

Pete Smith

Best Compensation Governance Practices

A client recently sent me a set of guidelines for use in ensuring appropriate governance of executive compensation.  While intended for health care institutions, this is an excellent set of processes for nonprofit boards to consider.  Some recommendations, such as having the compensation committee meet three times a year or engaging an outside consultant, may apply primarily to larger organizations, but most of these principles apply universally.

The recommended practices are:

1.    Establish a compensation committee, give it an explicit charge, define the process to be followed, and expect it to meet at least three times a year.  Do not let any insider sit on this committee.

2.    Establish a clear and explicit compensation philosophy and a set of policies to guide decisions, and provide an internal standard for evaluating practices.

3.    Follow established compensation philosophy and policies in making decisions.  When making exceptions, document the rationale for the decisions clearly.

4.    Evaluate every enhancement to executive compensation in terms of the impact on total compensation.  Document the deliberation and articulate the rationale for the change in minutes.

5.    Require a thorough review of the executive compensation program in full every two or three years.  Document the review carefully, demonstrating diligence in evaluating all details of the program with reference to competitive practices.

6.    Require full disclosure of all elements of compensation, including severance and retirement obligations.

7.    Charge the committee with reviewing compensation for all senior executives periodically.  Do no limit its purview to CEO compensation.

8.    Use a consultant to gather data on competitive practices.  Do not rely solely on corporate staff; have the board or compensation committee engage the consultant directly.  Have the consultant report directly to the board or committee – not through the CEO.

9.    Establish clear policies on reimbursement of executives’ business expenses and enforce them. Ask the auditor to report directly to the board on this.

10.    Charge the compensation committee with reviewing the nonmonetary rewards and perquisites for executives and board members.  Consider the likelihood of public criticism for using corporate resources for these purposes.

11.    Have the board and committees meet regularly in executive session.

12.    Strengthen the board by recruiting members who have the capability of leading the compensation committee, and assign members who understand performance metrics well enough to guide goal setting and oversee incentive compensation.

13.    Educate board or committee members on the legal requirements for governance of executive compensation, and make sure they have access to all the information they need to do a good job.

14.    Be proactive in communicating executive compensation in a positive way to the board, employees, and the community.

Source: Governance for Health Care Providers, ed. Nash, Oetgen, and Pracilio, Productivity Press, 2009

Limits on Nonprofit Compensation?

This is a letter I sent in response to a Pablo Eisenberg op-ed column in the Chronicle of Philanthropy, in which he advocated financial penalties for any nonprofit paying any executive compensation higher than the salary of the President of the United States.  Eisenberg's op-ed is here:  Charity CEO's Should Lead the Way.

My response was as follows:

To the Editor of the Chronicle of Philanthropy:

Pablo Eisenberg is right: charity chief executives should be compensated reasonably; their salaries shouldn’t be justified based on practices in the private sector; and some boards clearly could do a better job of overseeing compensation.

But limiting charity CEO pay to the $400,000 the U.S. President currently makes is absurd.  The President’s compensation is set at an arbitrary level, far less in constant dollar terms than that paid to George Washington. In no way does it reflect the enormous responsibilities of the position.  In fact, low Presidential pay has had a significant compression effect for federal manager pay, making it more difficult to attract top professionals into key career positions. 

Yes, $400,000 is a healthy level of compensation, especially in today’s economy, and especially in the non-profit world.  But there are many non-profit positions, such as the presidents of major universities or hospitals, where the size of operating budgets the complexities of managing risks, raising funds, and implementing change warrant compensation well above $400,000 – still much less than would be typically paid in the private sector for the same level of responsibility. 

Congressionally-mandated limits on compensation would further the disparity between non-profit and for-profit executives and undoubtedly lessen the pool of candidates for the largest and most complex nonprofit jobs.  Most nonprofit boards do a fine job determining compensation for their chief executives, and they should not let populist, anti-executive thinking stop them from paying what they think is fair and right.

Managing CEO Compensation – a Primer for Boards

To my surprise, I have been retained by three clients this year alone where the board of trustees unintentionally had neglected to address executive director compensation for over three years. 

In each case, the organizations had granted annual salary increases to employees generally, including all the ED’s direct reports.  In each case, the Board had no issues with the ED’s performance.  In each case, the ED was either too shy or too polite to ask “where is my raise?”  And in all these situations, the Board eventually decided to grant retroactive increases or special bonuses to make up for the omission.

That such a simple error appears to be so common is disconcerting.  To avoid this, trustees should adopt a process along these lines:

·      A senior board committee (executive, compensation, or governance) should be assigned the responsibility for coordinating the executive director’s performance review annually, reviewing compensation and recommending any changes to the full board.

·      The date for this review, and for any annual salary increase, should be either consistent with the review for other employees in the organization (such as date of employment or same date for everyone), or consistent with the close of the organization’s fiscal year.

·      The Board should periodically gather information on competitive executive director compensation, from the IRS 990 forms, published surveys, or privately conducted surveys. This information does not have to be collected every year – especially in as difficult an economy as we now face – but the Board should have a general sense of where the executive director’s compensation stands in regard to peer organizations of similar size, scope of mission, and geography where applicable.

·      The review process should cover more than just compensation.  This is a good time to discuss the executive director’s performance, the institution’s willingness to provide training and development experiences if needed, career expectations, management succession plans, and relationships with trustees and major stakeholders and contributors. 

·      The review process should be documented, not only to record the decisions made each year, but also to imbed the process into the organization and to provide guidance to trustees who rotate into the leadership of the committee handling the process. 

Discussing compensation can be difficult in nonprofits – everyone is focused on mission – and executive pay is rarely a priority.   That notwithstanding, it is lonely at the top, and it is incumbent on trustees to treat their leaders fairly and make sure that they get good feedback on their value and their performance. 

August, 2009

Pete Smith is the President of Smith Consulting.  The former President and CEO of Watson Wyatt Worldwide,  he now consults on executive compensation, primarily with nonprofits.  More information is at www.petesmithconsulting.com.

Welcome

I've created this blog to share my thoughts on managing nonprofit organizations, with particular emphasis on nonprofit compensation.  Feedback is welcome!