Executive Consolidations Reward Longevity, But Spark Controversy

February 2, 2015       Mark Hrywna      

Almost 200 years of experience left the American Cancer Society (ACS) during 2013 in the persons of five executive vice presidents who’d each been with the organization for at least three decades.

The 100-year-old charity, which that year reported almost $920 million in total revenue, has been in the midst of a multi-year transformation to re-imagine itself in its second century of existence.

It’s not the only organization in executive transition. Some of the nation’s oldest and largest nonprofits have embarked on some type of overhaul in recent years. Girl Scouts of the USA reduced the number of local councils by nearly one-third and during 2013 restructured its operations at the national office in Manhattan. The American Red Cross has been reducing redundancies within headquarters and among its chapters, with an aim to slice the number of regional chapters by more than one-third, from 96 to 62.

ACS estimated savings of about $20 million through a voluntary separation program (VSP) offered to eligible employees in March 2013. About 330 of 4,300 eligible employees accepted the buyouts, which required at least three years of service, offering $1,000 for each year of service to the organization. Despite the turnover, some 6,000 employees remain overall.

The transformation was never about saving money but about building a better platform, to become more productive and efficient organization, said Chief Financial Officer Catherine Mickle. “Savings was never an element of the goal,” she said.

The organization has gone through several consolidations during Mickle’s tenure, which she said continues to bring down the “permanent cost base.” However, there was never an original goal of reducing by a certain percentage, only that reorganization be the most effective and efficient, she said.

Among the aspects of the latest reorganization was the consolidation of nearly a dozen divisions around the country, rolled into one national organization. Four of the former division heads accepted the VSP incentives, with some reaching seven figures in total exit packages after taking into account retirement and deferred compensation in addition to severance payments.

ACS paid out more than $2 million in retirement compensation on top of nearly a half million dollars in severance as part of a voluntary incentive buyout, for total compensation of nearly $8 million to six exiting executives.

Four retiring executives ended up earning more than the $856,442 in total compensation. For ACS CEO John Seffrin, much of it was a result of a final change in actuarial value of supplemental retirement benefits, which included accumulated interest:

  • Donald Gudaitis, EVP, New England Division, was with the organization in a variety of roles for 36 years. He earned $2,142,984, of which $443,266 was retirement/deferred compensation, and $1,429,085 was recorded as other compensation, including severance of $122,918. Base compensation was $257,079.
  • Jarilyn Johnston-Allen, EVP, Midwest Division, served ACS for 33 years. Total compensation of $1,847,078 included $590,151 in retirement/deferred compensation, along with other compensation of $1,112,266, including $234,271. Base compensation was $131,402.
  • Donald Distasio, EVP, Eastern Division, was with the organization for 41 years. Total compensation of $1,374,322 included $204,273 in retirement/deferred compensation, along with $885,922 in other compensation, including severance of $126,031. Base compensation was $266,407.
  • Frank McGrady, EVP, East Central Division, was with ACS for 33 years. He earned $1,368,158 in total compensation, including $574,949 in retirement/deferred compensation and $575,849 in other compensation. Base compensation was $199,759.
  • Reuel E. Johnson, vice president, Relay For Life, retired after 40 years, earning total compensation last year of $742,213, including base pay of $212,078 and retirement/deferred of $172,055 and other compensation of $345,060.

The retiring executives were CEOs in the previous structure of about a dozen separately incorporated divisions. The exodus comes less than five years after another group of longtime executives left the organization, with some also cashing in seven-figure paydays after 30 and 40 years of service.

“It’s so completely atypical, it bears no resemblance to what 99.9 percent of charities would even dream of doing,” said Ken Berger, president and CEO of Charity Navigator. “As to whether it should be dreamt of, it’s a hard pill to swallow for most of us because it’s basically saying, ‘we want you to live as a millionaire.’ Working for a public charity, it just seems like something fundamentally wrong in that way of thinking, in that model of how we approach it,” he said.

“It seems to be that they are much more likely to follow the practices of the for-profit sector when they get to that size and scale,” he said. “When we get really big — really, really big — we default not to something that’s unique to the nonprofit sector but we seem to copy the sector that we’re supposed to be differentiated from,” Berger said.

It’s not that people who have been dedicated to an organization for many years should not have some (support in transition), Berger said, “but when it gets to the kind of numbers you’re talking about, it just seems to defy logic about what we assume what a charity is supposed to be about.”

“There are short-term costs associated with completing a major transformation but we believe this is absolutely necessary and will make us a much more impactful organization in the future,” Raul Duany, ACS senior vice president, corporate communications, said via an email. The society puts money aside every year to match the SERP (supplemental executive retirement plan) value so the payout is already planned for, he said.

“While staff who moved on had a great deal of wisdom, as part of our succession planning we still have many senior leaders on staff with vast instructional expertise,” Duany said. Senior leadership in ACS divisions have an average tenure of 24 years (a total of nearly 265 years). “We believe we have the right balance of veteran and newer staff leaders to continue to advance our mission,” he said.

 

The executive buy-out

About 15 percent of nonprofits offer chief executives some form of SERP, according to the most recent Salary and Benefits Survey by The NonProfit Times and Bluewater Nonprofit Solutions.

According to Mark Steranka, director at accounting and consulting firm Moss Adams in Seattle, Wash., nonprofits should look at succession planning as a two-pronged approach: planning and compensation. “Every organization should have some form of strategic plan and human capital should be part of that plan,” Steranka said.

Nonprofits are more commonly using deferred compensation, giving employees a reason to financially stick around, as a compensation strategy. Typically such “golden handcuffs” at nonprofits include contributing to a person’s retirement beyond a traditional 401(k) program, which usually are triggered by some combination of age and years of service. “That can become a very sizable amount and helping someone plan for retirement but also giving incentive to stick around,” Steranka said.

Eight full years of service — as of June 1, 2012 — triggered a lump sum payment of $641,710 in retirement funds for Michael Lomax, president and CEO of UNCF (United Negro College Fund). Total compensation ap­­proached $1.5 million during 2013 after taking into account bonus, other and retirement/deferred com­pensation. To comply with Internal Revenue Service (IRS) regulations which stipulate that taxes must be paid at the time the funds vest, the board decided that the most efficient way to comply was to distribute funds from which taxes can be paid, according to the organization’s Form 990 for the year ending March 2013. UNCF also set aside $278,198 in preparation for the 2014 payout.

Succession planning also isn’t just for the person at the top but for layers within the organization, Steranka said. “How do we develop options at each layer? If I’m the CEO, it shouldn’t be just one person who’s well positioned to take my place. The same goes for a vice president of development, it shouldn’t be just one person you’re counting on, because then one person goes out the door and you’re exposed,” he said.

Between Baby Boomers and two economic downturns, there could be a pent-up wave of retirements, Steranka said, as a lot of people had put their retirement plans on hold. It’s “not just those who should be retiring now, but also those who wanted to but had to put it on hold. The makeup wave that’s here now could extend in addition to what the regular demographics are,” he said.

Succession planning doesn’t always entail retirement packages but in some cases also includes severance.

There’s been a steady stream of leadership changes at the Girl Scouts of the USA since Anne Marie Chavez succeeded Kathy Cloninger as CEO in November 2011. They have come either through retirements or executives leaving the organization ahead of staff restructuring and incentive buyouts in September 2013.

Three executives received a combined $377,547 in severance. In one case, the severance was contractual, as part of an offer letter that if the executive was given severance, it would be spread out, according to a spokesman. The other two were non-contractual but part of normal severance packages at the time negotiated between the individuals, he said.

The tax filing covers the fiscal year ending in September 2013, when Girl Scouts headquarters offered eligible employees buyout incentives. Employees who were 55 and older with at least 10 years of service at the national office were eligible for the program. Roughly a third of staff positions were reorganized at the Manhattan headquarters after the buyouts.

Girl Scouts of the USA still paid Cloninger, who retired in November 2011, as recently as 2013. The former CEO received $385,883 in a one-year SERP payment, recorded as other compensation on the Girl Scouts’ most recent tax form.

Paying retirement compensation can be a point of negotiation with exiting executives. The late William H. Gray III, a longtime president and CEO of UNCF, who died in 2013, had been paid $150,000 annually since leaving the organization in 2004, in accordance with an agreement. NPT

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