FOUR CRITICAL ASPECTS OF NEGOTIATING
CEO EMPLOYMENT CONTRACTSNote: These materials are from an oral panel presentation made at the 1996 ASAE Management Conference.
- Four critical aspects of CEO contract negotiating
- Common termination provisions in executive employment contracts
- Sample CEO employment contract
- The Bucks Stop Here
- Panel Biographies
Four Critical Aspects of CEO Contract Negotiating
Negotiating a CEO employment contract may be one of the most challenging and important points in your career for both you and the organization you lead. This panel discussion will provide you with four critical perspectives on CEO employment contract negotiations: the governing board’s perspective; a CEO’s perspective on his recent negotiation; a financial advisors perspective; and a legal perspective.
The Board’s View
CEO employment contracts protect both the staff officer and the organization that he or she represents. From the governing board’s perspective, a CEO contract sets forth the board’s expectations for the chief staff officer including how the executive will be evaluated and the notice required for either the organization or the executive to terminate the relationship. Margaret Bower of the National Center for Nonprofit Boards will share some tips about what nonprofit boards should be looking for in an employment contract.The CEO’s View
Ed Kealy, executive director of the Committee on Education Funding, recently negotiated his first CEO employment contract. It also was the first contract negotiated by his governing board. Ed will share what he learned from his experience, including how he negotiated some important financial and evaluation clauses, and negotiated out some restrictive clauses.The Financial Advisor’s View
Securing a fair compensation package is a key aspect of contract negotiations for many executives. However, frequently executives are not sure what they should and can ask for beyond base pay. Bill Swanson of Edward D. Jones & Co. demystifies what is legally available to nonprofit executives in the form of deferred compensation and retirement planning.The Legal View
Employment contracts are primarily termination agreements. Attorney Sandra Pfau will discuss important termination provisions to include, and those you should keep out, of a CEO contract.Common Termination Provisions in Executive Employment Contracts
Salary
Include the number of months payout in the event of a no-fault termination. Generally the payout term depends on the length of service. For example: Request a minimum of 6 months with one month additional for every year of service to the association. Cap: Often a cap of 12 to 18 months is provided.Salary level
The payout rate should be based on the salary level at the time of termination, not the starting salary.Salary should include total compensation
Salary should include an amount equal to the value of monthly fringes, such as insurance and pension, plus car allowances, club dues, attendance at meetings, etc. If a fringe is not listed, it will not get included in the computation.Outplacement Services
Request that outplacement assistance from a leading outplacement company in the city be provided. Example: Provide that the employee will obtain proposals from three outplacement services and the association will pay an amount equal to the average of the three proposals.House repurchase
If you moved to new city and purchased a new home to accept the job, the contract should provide compensation for any loss resulting from the sale of a house so purchased.Letter of recommendation
Provide that neither the employee or the employer will make derogatory comments concerning the other, and that the employer will provide the employee with a letter of recommendation.Right to resign
Provide that the employee may resign and still receive all the benefits of no-fault termination provisions should the association chose to exercise the no-fault termination clause.Counsel fees
Provide that if there is a dispute regarding what the employee is entitled to under the no-fault termination clause that the association will pay the employee’s legal fees.This Agreement is made between the ABC ASSOCIATION (ABC) and ASSOCIATION EXECUTIVE (Executive), for mutual consideration, the receipt and adequacy of which is acknowledged by the parties, who agree:
1. Term. Executive is engaged by the ABC Board of Directors to serve as Executive Director of ABC for a three (3) year period from January 1, 1996 to December 31, 1998 (subject to the terms of paragraph 6 below). This contract, if mutually agreed by ABC and Executive in their sole discretion, may by December 31, 1997 be extended for an additional one (1) year period following successful completion of and positive performance reviews during both of the first two years of the contract. Provided that positive performance reviews continue in subsequent years, the contract, if then mutually agreed by ABC and Executive in their sole discretion, may be extended for one additional year following each positive performance year and, if so agreed, a contract with a term of two (2) years would exist at the commencement of each calendar year (subject to the terms of paragraph 6 below).
2. Duties.
A) Executive will exert his full time and energy to his duties as the Executive Director of ABC. His duties and responsibilities as Executive Director are as customarily performed by a person in such position and as specified in ABC’s bylaws, any position description for Executive Director, ABC’s rules, policies and other governing documents, by ABC’s Board of Directors, and by this Agreement. Executive is the chief employed officer who shall act at all times with a fiduciary duty to ABC. Executive reports to the Board of Directors and on a day-to-day basis he reports to the President of ABC.B) Executive shall work in the Washington, D.C. area as designated by ABC.
C) Executive shall be responsible for developing and recommending to ABC’s Board of Directors the annual budget and staffing plans. Executive shall have the authority to hire, supervise, evaluate and terminate all ABC employees based on the approved staffing plan.
3. Performance Evaluation. Evaluation and assessment of the performance of Executive shall be conducted on an ongoing basis by the ABC President and ABC’s officers, resulting in a formal written evaluation at least annually, prior to the anniversary date of this Agreement. The evaluation shall be based on an annual performance plan to be mutually developed by Executive and ABC’s President and officers. The annual performance plan shall provide for and assess performance of the general management of ABC and measurable goals and objectives for ABC and the Executive Director, taking into account the financial and staff resources made available by ABC. The annual performance plan shall be completed no later than the third month following the anniversary date of this Agreement. In the event that Executive’s performance is found to be unsatisfactory, the ABC President shall describe in writing, in reasonable detail, specific examples of unsatisfactory performance. Upon the conclusion of the annual evaluation, ABC’s governing board, in its sole discretion, shall determine the amount or type of increase in the salary and/or benefits of Executive to be made for the upcoming contract year.
4. Salary and Benefits.
A) The base salary of Executive is payable at the annual rate of One-hundred Thousand Dollars ($100,000). After the first year, Executive shall be entitled to an annual cost of living adjustment to base salary based on the COLA provided to federal workers which, in addition to any merit increases awarded in the sole discretion of ABC, create an annual base salary rate.B) Executive shall be entitled to the following paid benefits:
(i) a contribution to a pension plan acceptable to ABC at a rate equivalent to the annual rate of 10% of salary;
(ii) annual leave at the rate of 15 days the first year, and at the rate of 20 days for each of the next two (2) years (with no more than two (2) weeks eligible for roll-over and use in any year). A maximum of two (2) weeks annual leave will be compensated at the expiration or termination of this contract;
(iii) paid holidays at the rate of eight (8) days per year (on days to be determined by Executive consistent with his duties and responsibilities to ABC);
(iv) sick leave at the rate of one (1) day per month, with a maximum of 200 hours of accrued but unused sick leave during the full-term of this contract;
(v) personal leave at the rate of three (3) days per year;
(vi) bereavement leave at the rate of three (3) days in the event of a death in the immediate family of Executive or his spouse;
(vii) health insurance under a preferred provider organization selected by ABC, for single, individual coverage;
(viii) life insurance in the amount of two (2) times the salary of Executive;
(ix) disability insurance selected by ABC in its sole discretion; provided, however, that no salary or benefits may be taken or accrued until they are earned. The salary and benefits identified in this paragraph 4 constitutes the entire payment and compensation by ABC for the services of Executive.5. Business Expenses. ABC will pay or reimburse Executive for reasonable and necessary business expenses up to Ten Thousand Dollars ($10,000) incurred by Executive which are directly related to the performance of his duties of employment, including travel, professional memberships and professional development, subject to documentation by Executive and approval by ABC.
6. Cancellation.
A) ABC may cancel this Agreement immediately in the event of the death of Executive or the dissolution of ABC.B) ABC may cancel this Agreement 12 work weeks plus one day after the onset of physical or mental disability that prevents the effective performance of his duties for 12 work weeks plus one day or more (provided that after such cancellation ABC shall then continue to pay Executive’s salary either (i) for one-hundred twenty (120) days or (ii) until the date when disability insurance coverage commences, whichever is sooner.
C) ABC may cancel this Agreement immediately if Executive engages in an act or omission of dishonesty, fraud, misrepresentation, conflict of interest, breach of fiduciary duty, or any act of misfeasance malfeasance or moral turpitude. Upon cancellation, ABC must disclose to Executive the act or omission upon which the cancellation of this Agreement is based.
D) ABC may cancel this Agreement for other reasons, with or without cause, which need not be disclosed to Executive, by giving Executive thirty (30) days notice in writing, and then paying to Executive severance consisting of six (6) months salary plus one additional month salary for each year of completed service to ABC, a maximum of two weeks accrued but unused annual leave (but not accrued or other unused sick leave or any other leave), and the dollar value of six (6) months plus one additional month of all other benefits as described in paragraph 4. Payments shall be made on a regular twice-monthly basis during a period equal to six (6) months plus one additional month for each year of completed service to ABC.
E) Upon the expiration, cancellation or termination of this Agreement with or without cause, no accrued or other unused sick leave shall be compensated.
F) Executive may cancel this Agreement by giving ABC at least four (4) months advance notice in writing.
G) The content and procedures set forth in this Agreement (and not those set forth in any ABC handbook or manual relating to employees generally) govern this Agreement in general and its cancellation in particular.
7. Successors. This Agreement is binding upon ABC and Executive, their heirs, executors, administrators, successors, and assigns. Executive will not assign or delegate any part of his rights or responsibilities under this Agreement unless the ABC agrees in writing to the assignment or delegation. In the event of any merger, consolidation or reorganization involving the ABC, this Agreement becomes an obligation of any legal successor or successors to the ABC.
8. Indemnification. ABC shall indemnify, hold harmless, and defend Executive against all claims arising against Executive, his heirs, administrators and/or executors in connection with his employment by ABC and as permitted by law. Executive shall immediately notify the President and legal counsel of ABC orally and in writing upon learning of any actual or threatened dispute or legal process and shall cooperate fully in any defense or action.
9. Entire Agreement. This Agreement contains the entire Agreement between the ABC and Executive. It may not be changed or renewed orally but only by an Agreement in writing signed by the President upon prior Board of Directors resolution and by Executive. This Agreement supersedes and cancels all previous agreements between ABC and Executive.
10. Headings not controlling. The headings of sections of this Agreement are not controlling.
11. Governing law. This Agreement is governed by the laws of the District of Columbia.
________________________________________________________________________ Executive Date ________________________________________________________________________ President, ABC Date
The Buck Stop Here
Sandra K. Pfau
Reprinted from Executive Update, April 1995When the United Way/William Aramony story broke a few years ago, the National Charities Information Bureau reportedly received numerous letters from the public opining that no nonprofit executive should earn more than $100,000 a year. And while a Treasury Department proposal to impose an excise tax on excessive nonprofit compensation died with last year’s Democratic Congress, a new bill was introduced this year in the House that proposes to cap salaries of nonprofit officers and directors at the level of US Cabinet members.
Given the increasing publicity over CEO salaries and Congress’s forays into new regulation of nonprofit pay, association executives should be prepared to explain and defend their six-plus-figure salaries. It may also be time to do some self-assessment regarding how much is too much compensation in the nonprofit community.
The cornerstone issues
Brian O’Connell, former president of Independent Sector, has described four aspects of the nonprofit compensation issue:
¨ Some salaries are egregiously high.
¨ Some salaries appear to be high, but not enough time has been spent helping the public understand what it takes to attract and retain qualified individuals to lead large and complex organizations.
¨ There is an incorrect but common notion that salaries are overhead.
¨ The reality is that most salaries are so low that they threaten the ability of organizations to develop and maintain essential services.
IRS regulations look at a variety of factors to determine the reasonableness of compensation, whether for- or nonprofit: What is ordinarily paid for like services, by like enterprises, under like circumstances?
In the corporate sector, the IRS has a powerful weapon against out-of-the-ozone compensation: If a for-profit business is found to have paid excessive executive wages, the IRS can simply disallow part of the business deduction for the salaries and tax the business on the resulting increase in profits. Currently, no similar sanction exists for nonprofits. The IRS’s only choice is to revoke the organization’s tax exemption.
And self-policing seems ineffective. "The sector needs to speak out forcefully when there is evidence of inappropriate behavior," says Mark Rosenman, vice president, social responsibility, The Union Institute. But he notes that nonprofit leaders seem reluctant to do so against even the most outrageous abuse.
Educating a skeptical public
But avoiding discussion on nonprofit compensation makes it more difficult to educate an organization’s members and the public about why higher salaries are necessary, and dispel the notion that salaries are mere overhead. According to Henry Ernstthal, executive director of the Master of Association Management program at George Washington University, the public "just doesn’t understand the salary marketplace." The only way to educate them: "Keep repeating the message."
As O’Connell and others point out, the reality is that most in the nonprofit sector earn far less than their for-profit counterparts. One national survey indicates that the majority of nonprofit chief executives earn less than $75,000 a year, while other research shows that nonprofit staff earn only 70 percent to 80 percent of their for-profit peers.
Mary Cutler, a student in Ernstthal’s master’s program and foundation associate for the American Psychological Association, admits that she would like to make as much money as her for-profit counterparts, "but I don’t anticipate that I will." She believes that some of her student colleagues do plan to earn significant salaries, while others are more concerned with the psychic rewards of their jobs.
"Personally, she says, "I hope in the nonprofit field that I can make a greater contribution to society."
Ernstthal wonders about the validity of penalizing "people because they have good in their hearts." Nonprofits, he says, "ought to be treated like for-profits because they are competing for the same personnel. It’s already tough in the nonprofit marketplace. There is relatively little incentive pay, no stock options or some of the other benefits available to for-profit employers. You’re already a half-step behind."
If less, how much less?
Not everyone agrees that associations should match their corporate brethren when it comes to compensation. "There shouldn’t be equivalence between nonprofit and for-profit salaries," says Rosenman. But, he adds, the nonprofit sector should develop a consensus and "be clear what the normative expectations are."
A spokesperson for the National Center for Nonprofit Boards agrees: "The whole sector needs to discuss the theory behind nonprofit salaries. Do we believe that people [in nonprofits] should make less than those working for for-profits? If so, how much less?
Keeping the board aware
Ultimately, setting and approving compensation is the responsibility of the organization’s governing board. But it frequently falls to the chief staff executive to ensure that the matter gets the board attention it requires. "The chief executive should be making sure that it is one of the things on their plate," says the NCNB spokesperson.
The NCNB suggests that the chief executive remind the board that he or she needs to be evaluated and perhaps give the board a number of options on how that may be done. Most important, however, is that executive salary determinations are understood and supportable by the entire board.
Good Resources
The following publications are available to assist those involved in compensation decisions:
Executive Compensation, published as a special edition to Board Member, the newsletter of the National Center for Nonprofit Boards. Reprints: $12. (202) 452-6262.
1995 Association Salary Survey, published by the GWSAE Foundation. $95 for members; $130 for nonmembers. (202) 429-9370.
Association Executive Compensation Study, 9th edition, published by the ASAE. $95 for members; $175 for nonmembers. (202) 626-2748.
Compensation in Nonprofit Organizations, published by Abbott, Langer & Associates. $225 for the complete survey; $135 for trade associations and professional societies only; $150 for all nonprofits except trade and professional associations. (708) 672-4200.
Margaret L. Bower
National Center for Nonprofit Boards
202/452-6262Margaret is assistant director of education at the National Center for Nonprofit Boards (NCNB). She works with nonprofit organizations seeking assistance with board development activities and plans meetings and workshops sponsored by the Center. In addition, she is responsible for managing NCNB’s Board Information Center, which handles several thousand calls annually from board members and senior staff of nonprofit organizations on governance issues. Prior to her work at NCNB, Margaret was Associate Director of the Philanthropic Advisory Service of the Council of Better Business Bureaus.
Margaret serves as a board member and trainer for D.C. Hotline/PhoneFriend. She holds a Bachelor of Arts degree in Political Science from Tulane University.
Edward R. Kealy, Ph.D.
The Committee for Education Funding
202/543-6300Ed was appointed executive director of The Committee for Education Funding (CEF) in January, 1995. CEF is a coalition established in 1969 to achieve adequate federal financial support for American education. Ed came to CEF from the National School Boards Association where he served as Director of Federal Programs. In that capacity, he was responsible for legislative action on the federal budget and all federal education programs and represented local school boards at the White House and executive branch agencies.
Dr. Kealy is a former president of The Committee for Education Funding. He also is a member of the graduate faculty of Nova Southeastern University. Kealy received his bachelor’s degree from St. Peter’s College (NJ) and his M.A. and Ph.D. in sociology from Northwestern University.
Sandra Pfau
Law Office of Sandra K. Pfau
703/304-1204Sandra is general counsel to a number of charities, educational organizations, professional societies and associations. Prior to establishing her law practice, she served as an attorney with a nonprofit law firm and as a senior manager of a major scientific association. Sandra received her bachelor's degree, magna cum laude, from Eastern Michigan University, and her law degree and master of public administration degree with a concentration in nonprofit management from George Washington University. She is a member of the Virginia, District of Columbia and Ohio bars.
Sandra is active with the American Society of Association Executives (ASAE) and the Greater Washington Society of Association Executives (GWSAE). She has chaired GWSAE’s Congressional Breakfast and currently chairs the Virginia Subcommittee of GWSAE’s Government Affairs Committee. In addition, she is an adjunct professor at Trinity College, the University of Baltimore and The Washington Center, and serves on the board of her local undergraduate alumni association and the Calvary Foundation.
William R. Swanson
Edward D. Jones & Co.
703/465-4714Bill Swanson has been an investment representative with Edward D. Jones & Co. since 1993. He actively assists individuals, nonprofit organizations and for-profit businesses develop investment and retirement plans. Prior to establishing the Arlington, Virginia office of Edward D. Jones & Co., Bill served as an attorney with the United States Air Force for ten years, focusing on USAF tax litigation. Bill received his bachelor's degree from The Citadel, Charleston, South Carolina, and his law degree from Mississippi College School of Law. Bill also has completed the Graduate Legal Taxation Program at Georgetown University Law Center.
Bill is active with the Arlington Chamber of Commerce and is a frequent lecturer at retirement facilities, bookstores and libraries.