October 23, 2023

Navigating Executive Transitions: How Nonprofit Boards Can Proactively Prepare – Part 1

By Karen Schuler, Partner, Nonprofit Search, Transition & Planning

Navigating Executive Transitions: How Nonprofit Boards Can Proactively Prepare – Part 1 Nonprofit & Social Sector

Nonprofits led by long-tenured (10+ years) executives often have a rhythm to the executive-board relationship that is unique to the executive. The rhythm may be further ingrained when board leadership has been in place for years.  Many boards feel prepared for the executive’s eventual departure by implementing the easy answer: adopting a CEO succession policy that outlines the actions they will take when the executive departs. However, they may not recognize some of the work the board should invest in during the years preceding the long-tenured executive’s departure to be positioned to engage successfully with the next executive.

Boards of nonprofits led by founders or long-tenured executives should consider the work they need to do in the following areas:

CEO Compensation

Nonprofit boards should consider a CEO compensation benchmarking study conducted by an independent source to support the board in establishing a CEO compensation philosophy, assessing whether or not the current CEO compensation is market-relevant, and implementing actions in the annual budgeting process to align CEO compensation with the philosophy and market data.

What is our CEO compensation philosophy?

Setting a CEO compensation philosophy ensures the compensation program is fair, equitable, and aligned with the market and establishes a methodology for CEO compensation that future boards can use. The philosophy might reflect the organization’s approach to pay equity, the ability to retain talent, and positioning CEO compensation in a range aligned with the market (i.e., 40th to 60th percentile or at 50th percentile with the flexibility to pay up to 75th percentile based on XYZ, etc.). The board should also consider aligning the CEO compensation philosophy with the organization’s philosophy around staff salaries.

What does the current market look like?

The benchmarking study includes data from peer organizations and published salary surveys, with information adjusted to the current year and a geographic wage differential applied as necessary. While the board may ask the CEO to share their suggestions for peer organizations, the board must do the work to identify the comparability criteria for potential peer organizations, consider a broader range of likely peer organizations, and work with an independent firm to finalize the list. The data should aggregate percentiles (25th, 50th, 75th, etc.) for base salary, annual cash incentive/bonus, and total compensation.

How does current CEO compensation compare to the range that resulted from applying the CEO compensation philosophy to the benchmarking data?

If the current CEO’s compensation aligns with the current market as determined by the compensation philosophy, the board’s work is done. If the current, long-tenured CEO’s compensation significantly exceeds the market, the board will need to consider the impact of this publicly available information when setting new CEO compensation.

How do we navigate an under-compensated CEO?

In many cases, boards discover that their long-tenured executive has been under-compensated, potentially for years. Sometimes, this reflects decisions made between the executive and the board to minimize executive pay to meet tight budgets or reallocate funds to staff pay. With the organization’s financial health as an essential guide, the board should discuss the following:

  • Annual budget actions to align CEO compensation with the market: If the CEO’s salary is significantly under the market, the board may need to consider a multi-year approach to bring the salary current.
  • Potential for “catch-up” pay: The board can also discuss awarding bonuses or reserving funds to distribute to the current executive as part of an exit agreement with a financial “thank you.”
  • Navigating founder who insists on a nominal salary: In some cases, the board is working with a founder who does not want a market-aligned salary. The board should include the market-relevant salary in the budgeting process to prepare the organization for the CEO’s pay and compensation when the next executive is hired.

The rhythm between the CEO and the board often shapes the cadence for the entire organization. Inevitably, new CEO leadership will bring a change in tempo. That’s why setting the CEO compensation philosophy, understanding the current market through benchmarking, and considering potential changes to CEO compensation are some of the first steps for a board to prepare for the next CEO transition, whenever that transition occurs.

The next step is for the Board to think about its own development – composition, board officer succession planning, governance model, board chair – executive relationship – to position today’s board to be ready for tomorrow’s executive. See Part II in our November newsletter.