Guide to Executive Compensation

Guide to Executive Compensation:
Balancing the Interests of the Non-Profit and the Chief Executive Officer

One of the most difficult decisions the Board of Directors of a non-profit organization has to make is deciding on the compensation agreement with the chief executive officer (CEO). There are different types of negotiations that take place between a select group of volunteer leaders and CEO. First, there are the initial discussions when a CEO is first hired by the Board. The process of making the offer to the preferred candidate can be completed in one meeting or may need several conversations involving selected volunteer leaders.

Often a search committee will be comprised of the sitting president of the agency, senior leadership, past presidents and officers. There may also be a representative of the staff and/or members of the community at large. (See the previous posting that discussed the “search process”). The CEO’s remuneration is generally referred to as a “compensation package” and it can include the salary, fringe benefits (health insurance, pension, relocation costs (when appropriate), use of a car and/or reimbursement of car expenses and travel allowance, among other benefits.

The second type of negotiation takes place after the CEO has been working for the organization and the employment agreement or contract comes up for renewal. When the board of directors is pleased with the CEO’s performance and contribution to the agency they generally offer an increase in salary and/or benefits. It is quite possible that there will be some negotiations between the CEO and the Board if there is a disparity between the Board’s offer and what the CEO is seeking in the form of increased compensation for fulfilling the responsibilities of the position.

In either of these types of negotiations there has to be a balance between what is in the best interest of the organization and what the CEO is seeking. Determining an appropriate compensation package can often be a challenge to both the volunteer leaders and the agency’s executive. The Board has to decide what it can afford in the way of its cost to engage a new CEO or to renew the present CEO’s agreement. The selected candidate needs to decide what the minimum requirements are for an acceptable compensation package. An incumbent CEO also has to consider the increases and enhancement to the present package to present to the volunteer leadership. They then determine whether the agency can afford to renew the contract at the requested level.

Once the CEO and the voluntary leadership have made their requests and positions known to each other they begin a process of trying to reach agreement. At this point there is a mix of the “4 P’s”; preferences, personalities, politics and public relations. These elements constitute the principles guiding the development of a compensation package that is acceptable to the CEO and the voluntary leadership of the organization.

Preferences: The process begins with the Board of Directors and voluntary leadership expressing their preference for the specific candidate in a search process for a new director or for continuing the incumbent’s employment. At the same time, the person selected to assume the CEO’s position wants to be employed by this specific non-profit and has expressed a preference by pursuing the position and entering into the discussions about a compensation package. In a similar way, the CEO who is renewing a contract instead of exploring other potential positions is demonstrating a commitment to continue working with this organization and its volunteer leadership.

Personalities: In negotiating a compensation agreement the personalities of those involved in the process play a very important role. One side cannot dictate to the other, and ultimatums are not useful. It is important to honor the process and negotiate in good faith. When the negotiations are completed the CEO and the volunteer leaders will be working together so the process should be amicable and respectful.

Politics: There is a political aspect to all negotiations. During the process of reaching an agreement between the CEO and the volunteer leadership there needs to be an understanding of the stresses and strains on each party and on the process itself. When concluded the nature and terms of the agreement have to make it possible for both sides to work together with mutual trust and respect. This is possible if the process of reaching an equitable compensation package was one that acknowledged the agency’s interest in engaging the highest quality of professional leadership and the CEO’s recognition of the economic reality of the non-profit where he is employed.

Public Relations: Transparency is crucial for the non-profit organization’s image in the community and for the staff members’ respect for the volunteer leadership. If the agency is to build a positive image and have complete transparency then it should be prepared to respond to questions about the CEO’s compensation package. The salary and benefits have to be appropriate for the responsibilities and the resources of the organization. There should not be any form of remuneration that will embarrass the organization and the leadership. In addition, if donors, funders and foundations supporting the services of the organization were to be informed of the CEO’s level of compensation will they question it? What is the differential between the CEO’s salary and that of other staff members? Is the disparity reasonable?

When non-profit Boards are negotiating with either an incoming CEO or renewing the contract of the present CEO they should use these “4P’s” to establish the guidelines for reasonable, equitable, and realistic compensation packages that will not question the credibility of the organization in the community and with the staff members.

Stephen G. Donshik, D.S.W., is a lecturer at Hebrew University’s International Leadership and Philanthropy Program and has a consulting firm focused on strengthening non-profit organizations and their leadership for tomorrow. Stephen is a regular contributor to eJewish Philanthropy.