Executive Evaluation and Compensation

Leading a nonprofit organization is a tremendous responsibility, both for boards and executives. Boards that don’t pay attention to executive evaluation and compensation are opening the organization up to serious risk.

 

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 adequately — but not excessively — compensating the executive is critical to leadership sustainability.

Boards that don’t pay attention to executive evaluation and compensation are opening the organization up to serious risk. 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. Boards that don’t manage their review processes well are exposed.

To ensure that boards are setting clear expectations for executive performance and doing their due diligence on executive compensation, BoardSource recommends the following:

  • A formal, written review of performance each and every year. This does two things: It gives the executive the opportunity to report on his or her progress against goals, and it 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.
  • An annual 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.
  • Regular review of compensation. While some organizations may not review the executive compensation package on an annual basis, it’s important that this be done at least every few years, and that the board and executive have a shared understanding of the frequency and process for this review. 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.
  • Use of external salary benchmarks. 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 executive compensation at organizations of similar size, scope, and geography. 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.
  • Full board approval of the 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.

BoardSource has numerous resources designed to help you conduct a formal, written performance assessment of your executive — including our Assessment of the Chief Executive tool — and design a fair and formal process for setting executive compensation.

R+S Weekly, publications, and more

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Community and Member Resources

All 101-level community resources listed below are available publicly. BoardSource members have access to 101-, 201-, and 301-level resources. Don’t forget to visit the BoardSource store for more resources on this topic!

Board Responsibilities and Structures — FAQs

101| Community resource. BoardSource has been answering governance-related questions posed by nonprofit leaders for more than 25 years. Here are the answers to some of the most frequently asked questions about board responsibilities and structures.

Chief Executive Performance Evaluation

201| Members only resource. The board delegates the management and administrative duties to the chief executive. To ensure that the right person is running the operations assumes that regular performance reviews take place.

Developing a Compensation Philosophy

301| Members only resource. Compensation is impacted by a multitude of issues and requires serious attention. To facilitate this awareness, it makes sense to draft an overall organizational compensation philosophy that guides the board and the chief executive in their respective obligations.

Nonprofit Chief Executive Job Description

201| Members only resource. The chief executive is responsible for the overall administration and management of XYZ, including service programs, fundraising, and business operations. The job description outlines the areas of responsibility include planning and evaluation, policy development and administration, personnel and fiscal management, and public relations.

Performance Expectations for the Chief Executive

201| Members only resource. Clarifying job expectations is essential for both employees and supervisors. The position of chief executive of a nonprofit is no exception. Since one of the key tasks a board has is to evaluate the chief executive’s performance once a year, it is important that a mutual understanding and agreement of the anticipated accomplishments exists between the board and the chief executive.

Private Benefit, Private Inurement, and Self-Dealing

101| Community resource. Private benefit, private inurement, and self-dealing are defined by the Internal Revenue Service as unacceptable practices for nonprofit tax-exempt organizations. The IRS expects nonprofits to exist for the public good and not to be created or operated for the benefit, financial or otherwise, of a private individual. Violation of these doctrines can result in heavy taxation and/or loss of nonprofit status.

What to Evaluate

201| Members only resource. Performance assessments often raise concern and even fear. Many people associate them with judgment, unfairness, and the need to defend one’s actions. However, without appropriate monitoring and feedback, it is difficult to evaluate whether you, your board, and your organization are meeting goals and making progress.