Six Figure Retention Bonuses
June 1, 2010 Mark Hrywna
The stock market was booming and the housing market was still on the way up when Mary-Alice Frank was hired as chief executive officer of the American Red Cross of Greater Cleveland in 1999.
The chapter’s board agreed to a 10-year retention bonus under an agreement reached with their new CEO. Fast-forward 10 years and the economic landscape in America could not be more different: widespread layoffs, rising unemployment and home foreclosures have created a period often referred to as the Great Recession.
During the past year, the Cleveland chapter has frozen salaries, cut staff, implemented unpaid mandatory leave and eliminated 401(k) contributions. Despite a drop in revenue and assets, the chapter was still contractually responsible for a lump sum payment to Frank in February, 2008 of $134,089. The payment was funded through an annuity paid during the 10-year period but by example was equal to 2.27 percent of the revenue the chapter brought in during 2008.
Called a one-time, 10-year retention bonus, it was roughly 60 percent of Frank’s base salary of $221,364 last year, bringing her total compensation to $545,882, according to the Red Cross’ Internal Revenue Service (IRS) Form 990 for Fiscal Year Ending June 2009.
The Cleveland chapter declined requests for an interview, instead answering questions via email. Press inquiries regarding the Form 990 and compensation were handled through the American Red Cross headquarters in Washington, D.C.
Frank was the only executive listed among 14 on the Form 990 who was under contract. Red Cross headquarters provided a copy of the Fiscal Year Ending 2009 Form 990 in mid-February when it was filed and posted on its Web site. The employment agreements were a year in length and would renew automatically each year, according to Laura Howe, senior director, public affairs. The terms state that either Frank or the chapter could terminate the agreement, “thus the idea behind the bonus was to encourage her retention at the chapter,” she said.
The Red Cross declined to release a copy of the contract between the Cleveland chapter and its CEO claiming it to be a confidential, internal human resources document. How many chapter presidents work under a contract is unclear, as national does not ask chapters for that information, according to Howe. The Red Cross, she added, is in the process of completing a nationwide study of chapter executive salaries.
In a written statement provided to The NonProfit Times, leaders of the Cleveland chapter explained that they “wanted to ensure management stability for the organization.” As part of her agreement, the bonus was to be paid in 2008 “only if she performed satisfactorily and stayed in her leadership role for 10 years.”
The statement to The NonProfit Times was signed by Richard Pogue, chairman of the Cleveland chapter’s board, Hugh McKay, immediate past chairman of the board and sitting chairman in 2008, and Dennis Lehman, board chair emeritus and sitting chairman in 1999.
According to a Bluewater/The NonProfit Times 2009 salary survey, the average base salary for a nonprofit CEO last year in the North Central U.S. (which includes Ohio) was $165,771 while the high was $551,250, just $5,368 more than Frank was paid. The average bonus was 7 percent and the average tenure for a CEO was almost 11 years.
For organizations with revenue between $5 million and $9.9 million, the average base salary was nearly $173,000, with a maximum of $400,000, some $145,882 less than what Frank was paid. Even when just base salaries are compared, Frank outpaced the region and size of organization by $48,364. Nearly a third of those organizations awarded bonuses, which average almost 12 percent. The average tenure for a CEO at those organizations was more than 11 years.
The Cleveland Red Cross chapter set aside a fixed amount, $3,500, each year along with semi-annual calculations based upon 3 percent of her salary. A 4-percent interest return was calculated based on the accumulated balance at the end of each calendar year, according to the Cleveland chapter. The previous chief executive at Cleveland also worked under a contract and received a retention bonus.
The contract states that in the event Frank reached age 55 while actively employed by the chapter, she would receive the distribution of the account. She met this requirement in January, 2008. If her employment had been terminated prior to age 55, the account would have been forfeited and she would not have been entitled to receive the retention bonus, according to the chapter. At the time of her hire, Frank’s contract also included provisions for a severance agreement and a life insurance policy, in which the chapter was named as a beneficiary.
The Cleveland chapter’s statement continued: “Under her leadership, the Greater Cleveland Chapter has been consistently regarded as one of the premier chapters in the country, regularly receiving recognition for its fiscal management and stewardship of donor dollars. Its service role has expanded from just Cuyahoga and Geauga counties to include Lake and Ashland counties as well. Based on its successful program management, the national Red Cross recently designated the Greater Cleveland chapter as a regional chapter with oversight of additional chapters: Ashtabula, Firelands (which includes Huron and Erie counties), Lorain, Richland and Wayne.”
Frank did not receive a raise last year and participated with the rest of the staff in an unpaid furlough week, the statement noted. The chapter’s annual report also indicated staff cuts, a salary freeze and eliminating contributions to the 401(k) plan last year.
The furlough week and salary freezes were “part of an expense control strategy as the chapter dealt with the significant funding challenges and economic downturn of the recession,” according to the annual report.
The recession affected investments, philanthropic giving, health and safety courses and product sales, as well as special event proceeds as the effects of the downturn began to take hold in late 2008-09. However, the chapter said it was never in “financial peril.”
The Cleveland chapter last year reported total revenue of $5.9 million, a 22-percent decline from $7.6 million the prior year while expenses remained roughly the same, at $9.2 million, according to its financial statements. Net revenue from special events was down by almost $300,000, about 60 percent. Investment losses grew by more than $1 million and unrealized losses on charitable annuities were up by almost a half million dollars.
“We firmly believe that Mrs. Frank’s base compensation and the one-time retention bonus reflecting her 10 years as CEO (and 31 years as a Red Cross employee) is appropriate for the size and responsibilities of the organization,” according to the board members’ statement.
“That’s so atypical of most nonprofits, especially now, the idea of giving a bonus of six figures is pretty much in the stratosphere,” said Ken Berger, president and CEO of Charity Navigator.
“To be fair, the Red Cross is in the stratosphere. It’s the biggest of its kind, a multibillion-dollar organization,” he said, although it has experienced significant financial strains in recent years.
Heather Eddy, president and chief operating officer at Alford Group Executive Search in Evanston, Ill., estimates that about 15 percent of the firm’s searches have included retention bonuses as part of compensation. She said it’s become much more common in the past 11Ú2 to two years. “It’s something being asked for by candidates more often than not as part of final negotiations, especially at the CEO level or larger, more structured organizations,” Eddy said.
“I think the reason candidates are insisting on it is the environment is so volatile. If you’re coming in to accomplish a monumental task and achieve significant change, they want some degree of protection that they achieve some change but the half of the board members that don’t like it aren’t going to turn around and try to get rid of them,” Eddy said.
“It’s a result of the pressures for change and performance are greater than ever, it’s do more with less. Candidates accepting these positions want some degree of assurance that they’ve got a little bit of latitude to make some decisions without having the next day be given a pink slip,” she said.
Retention bonuses are most common in healthcare and senior care industries, Eddy said, where the talent pool is very thin. She often suggests to boards bonuses with three- to five-year contract cycles. “It’s hard to commit an organization for five years of pretty significant compensation without knowing what that future is going to bring,” she said, so a retention bonus is a risk for both sides but it also can be very healthy.
“Anyone truly committed in the nonprofit sector is not going to take a position or accept a leadership role just because of the retention bonus. That’s where I think the corporate sector has used it in more hard-to-fill industries or higher-level positions where mobility is more of an issue,” Eddy said.
A retention bonus can sometimes make people work a little harder, on both sides, according to Kristin Mannion, global nonprofit sector leader for Korn/Ferry International, in Washington, D.C. “Not everybody does it, but it’s great to have if you need it,” she said, adding the most important piece for success is alignment around the board, defined objectives and metrics. Such arrangements can keep the board and CEO in alignment.
“There definitely are times when those tools are really good tools to have, if you need them. If you don’t need them, you shouldn’t use them. It’s a way to force a board to talk to each other,” Mannion said, and to foster focused communication between the CEO and the board.
Recruiting talent is among the most important things a board will do, Mannion said, adding a retention bonus can serve as a marker or rule to keep everyone focused. It helps maintain a level of communication between the board and CEO because it’s a metric-based retention. A retention bonus is not just based on being at the organization but has metrics attached to it, she said.