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Employment Agreements

By Mark Hrywna - August 1, 2014

When a professional sports team has one of the best players in the business, it’s often wise to lock them up in a long-term deal. It’s why Alex Rodriguez was signed to 10-year contracts twice during his career.

OK, so the best athletes sometimes make more per year than most nonprofits, but the contract analogy is still true for about 1 in 5 charities. When it comes to executive em­ploy­ment agreements, about 20 percent of nonprofits consistently use them for their chief executives.

A review of the five years’ worth of data (2009-2013) from The NonProfit Times/Bluewater Nonprofit Solutions annual Salary and Benefits Report indicates that percentage has remained consistent over the years, ranging from 17.9 percent in 2009 to 21.46 percent last year for the positions of presidents, chief executive officers (CEO) or executive directors. The average term of the agreement has been even more consistent over that time, ranging only from 2.5 to 2.7 years.

“It’s really dependent upon which part of the nonprofit sector you’re in,” said Tom Flannery, a partner at Mercer consulting with expertise in CEO compensation. Em­ploy­ment contracts for CEOs are very common in healthcare and among larger foundations (those with hundreds of millions of dollars). “It’s not terribly common in smaller nonprofits, which is principally a function of the fact that they don’t have tremendous resources,” he said. “If you see it in small nonprofits, it’s more likely to be in healthcare or higher education, but the really small organizations just don’t do it.”

Generally, where you will find these practices are where they’re recruiting from the outside, Flannery said. “They need to provide a clear statement of the employment relationships. So if someone’s being hired out of XYZ corporation into a nonprofit, it’s very typical,” he said. If moving from one nonprofit to another larger nonprofit, it’s very typical; if someone has a contract, they’d often not move unless they got a new contract.

By sector, the length of agreements ranged from 2 years (education) to 3.3 years (health), in the most recent survey. Agree­ments were most common among mutual, membership benefit organizations (39 percent) and education (26 percent) but least likely to be found among environment and animals (8.5 percent).

Agreements were most common in the largest organizations, $50 million or more, at 32 percent. It wasn’t unheard of at the smallest organizations: more than 19 percent of organizations less than $500,000; 17.75 percent among those $500,000 to $1 million, and more than 15 percent among those $1 million to $2.5 million, and $2.5 million to $4.9 million.

Even among the least common categories, it wasn’t unheard of: 14.3 percent at the second-largest organizations and more than 15 percent – that’s more than one of every seven organizations.

In last year’s survey, employment agreements were most common within mutual, membership benefit (60 percent) and education (41 percent). Other categories ranged from 9 percent within environment and animals to 26 percent among arts, culture and humanities.

The most common contract term among the nearly 800 organizations in the survey, by far, was a confidentiality clause, used by 79 percent of respondents in last year’s survey. By sector, the percentage of respondents using a confidentiality clause ranged from 60 percent to almost 90 percent. The next most popular terms were a non-solicitation clause (37 percent) and non-compete restriction (40 percent). The least likely used terms were an evergreen provision (9.5 percent) and golden parachute (8 percent).

Golden parachutes might have been the least popular contract terms used overall, by only 8 percent, but that number spiked to one-third and one-quarter of the largest organizations, those with operating budgets of $25 million to $50 million, and $50 million or more, respectively. By sector, golden parachutes were most likely to be found within education (18 percent) and human services (12 percent), according to the survey. The survey indicated a decline in use of a golden parachute clause by 10 percent, which was second to non-solicitation clause, down 17.5 percent.

Contracts, however, are not as lucrative for executives as they were in the past, according to Flannery. “It’s part of a trend that’s happening, you’re seeing fewer golden parachutes in publicly traded companies; that’s having an effect in nonprofits,” he said.

Where there used to be severance arrangements for four to five years, now Flannery said he’s seeing 10 to 12 months. “Nonprofits are like everyone else,” he said, and board members reading about these deals in the news are becoming more acutely aware of public perception, which may be driving a reduction. “That’s not to say that those practices are not appropriate. Board members are becoming much more concerned about the obligations they have, post-termination,” he said, amid concerns about using financial resources of an organization more efficiently.

Last year, a common contract term overall was confidentiality clause, by far, with almost three out of four organizations reporting using it. The least common continued to be an evergreen pro­vision and golden parachute, at less than 11 percent for each. Among categories, the use of golden parachutes varied but was least likely at organizations of less than $1 million operating budget.

The average term of agreement was 2.5 years overall, ranging from 2 to 3.1 years with the exception of the largest organizations. Those with operating budgets of $25 million to less than $50 million had an average of just 1 year and those with $50 million-plus budgets average just 1.6 years.

A signing bonus for a new CEO is not atypical, according to Flannery, but they used to be governed by a single trigger, such as remaining in the position a year, and now a double trigger is becoming more common, staying for a period of time but also meeting specific standards of performance. “It’s consistent with what’s happening in the for-profit sector, they’re not just getting it because they’re able to survive in a period of time,” he said.

There’s a clear increase in the performance expectations of top executives at nonprofits and it doesn’t matter what size, Flannery said. “Performance is becoming the focus of a lot of boards.”

Flannery expects performance expectations of executives to be a recurring theme among nonprofits in the coming years. People would argue that they have existed previously but performance expectations moving forward “will be on steroids,” he said. There are many more board members today who are much more sophisticated, educated, and understand governance and management issues than 20 or 30 years ago, he said. NPT

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