Executive Evaluation and Compensation
Leading a nonprofit organization is a tremendous responsibility, both for boards and executives. Executive evaluation and compensation is part of the board’s role to ensure resources and provide oversight; it is also an opportunity for risk mitigation.
Celebrating accomplishments and sharing honest and candid feedback about opportunities for growth is essential to the success of the executive and the organization. Similarly, ensuring that the organization is appropriately — but not excessively — compensating the executive is critical to compliance, leadership retention and succession.
One doesn’t have to look far to find evidence of public officials or the media questioning the appropriateness of a nonprofit executive’s compensation. The expectation is that executive leaders are paid comparable to their counterparts in their community and their sector. Alternatively, leaders may be underpaid based on the market rates for their community and the sector in which they operate. When an executive transition occurs, the board may need to consider increasing the salary to attract a new leader.
To ensure that boards are setting clear expectations for executive performance and doing their due diligence on executive compensation, BoardSource recommends the following:
Executive Performance Review and Assessment
A formal, written review of performance each and every year. A CEO assessment gives the executive the opportunity to report on their progress against goals and invites each board member to reflect on the executive’s overall performance. BoardSource also highly recommends that input from the executive’s direct reports be included as a part of the assessment, to ensure that the board has a strong understanding of the executive’s leadership within the organization, which is something that can be difficult for the board to assess without that input.
Executive Goal-Setting Process
As a part of the review process, the executive and the board should discuss and formalize goals for performance for the next year. These goals should be rooted in organizational performance against strategic goals, as well as the overall leadership of the executive.
Executive Compensation Review
Executive compensation package should be reviewed t every few years to ensure the board and executive have a shared understanding of the frequency and process for this review. BoardSource recommends boards develop a CEO compensation plan, which can help with recruiting and retaining the chief executive. This review process and frequency may be outlined as a part of the executive’s employment contract, if applicable, or simply as a conversation between the board and the executive
Industry Benchmarks for Executive Salaries
It’s essential that boards have an understanding of the market as they make decisions on compensation. There are a number of resources available, including GuideStar’s compensation report, that enable boards to access information about nonprofit executive compensation.
Factors that influence an executive’s compensation and salary include:
- Organization size
- Scope of responsibilities
- Geography of where the organization is located
Some boards engage a compensation consultant to help conduct a more sophisticated scan of salaries, a practice that may be especially important if the organization feels that it is at risk of accusations of excessive compensation. State Nonprofit Associations often compile a salary survey by subsector as well.
Board Approval of Compensation Package
While it’s likely that the work of researching and recommending the compensation package will be delegated to a committee, it’s important that the full board be informed of the recommendation and have an opportunity to discuss and vote on it. This ensures that the decision has the benefit of the full board’s perspectives, rather than a small and potentially insular group.
