To pay or not to pay? That is the question…which heated up a surprisingly emphatic conversation between two longtime colleagues and consultants in nonprofit leadership. On the topic of severance pay for nonprofit executives, each of us was unwaveringly correct, confidently justified, and temporarily naïve. Now, having compared actual experiences that challenged our philosophical approaches, we are united in our stance on exit compensation as an important and appropriate benefit for nonprofit executives in certain circumstances.
Yes, it’s situation-specific. Not every nonprofit CEO gets to leave her or his leadership position with a check. Perhaps not unexpected is the package offered to an executive who faces an insurmountable hurdle in leadership — some wrongdoing or public relations nightmare that calls for the end of her or his tenure. “Hush money” or the buy-out of an employment contract can seem a sound investment in enabling an organization to move forward. While often wise, such pay-outs illustrate an almost cultural predisposition to rewarding poor performance. What happens with the successful, longtime leaders who simply recognize – or don’t recognize – it’s time to move on?
Unfortunately, often nothing. While commonplace in the for-profit sector, executive exit packages remain contentious in the nonprofit community. Nonprofit boards are accustomed to complying with IRS laws that forbid the use of funds for the benefit of any individual. Breaches in such practices, including excess executive compensation for any reason, can result in hefty fines for both the executive and the nonprofit organization, as well as the threat to the latter’s tax exempt status.
As a result, organizations that could afford to be generous with outgoing leaders withhold financial gestures in favor of farewell celebrations and perhaps naming rights to a legacy fund. The beloved, longtime Executive Director of a mid-sized healthcare advocacy organization left in frustration when he decided to pursue a new career. His transition would require advanced education, precluding full-time employment, so he was especially disappointed to find his previously supportive board narrow in its interpretation of its obligation to donors. While happy to leverage the transition as a fundraising opportunity, the board was reluctant to direct a single dollar away from the mission and toward the outgoing individual.
As a rule, nonprofit boards understandably shy away from the concepts of “golden parachutes” or “golden handshakes,” which offer executives financial cushions in the event of separation from their organizations. Traditionally, the golden parachute floats an executive whose job is eliminated through a merger with another organization; the golden handshake tends to be more liberal in its protection, as it applies to executives who lose their jobs through layoffs, restructuring, or even scheduled retirement. In most cases, the promise of such severance packages are negotiated up front as part of the executive’s contract and compensation.
Needless to say, the founder of a nonprofit organization doesn’t negotiate upfront about her/his departure (even once the board is in place). Nor does the longtime, devoted leader often consider the end of her/his tenure at the beginning. Yet that person likely invests endless energy and time into the effort to build a sustainable organization at the expense of her/his own earning potential, savings, and sleep. At some point, it’s likely that leader will reach the point of having given all she/he has or a juncture where the board – if engaged and honest – realizes the organization needs to proceed in a direction or at a pace that the incumbent cannot reach. While such crossroads are common, boards often backpeddle or slow down, for fear of losing or sacrificing their beloved founders or longtime leaders. By contrast in the for-profit sector, entrepreneurial leaders expect early investors to reward and replace them with seasoned executives who bring experience in taking companies to the next level.
What if nonprofit executives shared the same expectation of reward for achieving identified goals and replacement when the right time (for the individual and/or the organization) comes? Perhaps the nonprofit board/CEO partnership would benefit from the freedom to aim beyond their respective capacities toward mutual benefit. Sometimes, the best way to proceed toward shared goals is to part ways.
According to Nonprofit Quarterly, there is an unshakeable tenet of successful executive transitions: “to have a good beginning with a new executive, it is important to have a good ending with the departing executive.” Many boards unwittingly add strain or difficulty to a transition by paying insufficient attention to crafting a good ending for the outgoing leader, especially founders or longtime incumbents.
Indeed, “happy endings” must be crafted. As described by Nonprofit Quarterly, an “exit agreement” can serve as a script to such fairy tale endings. Unlike a separation agreement, which is a contract designed to limit an organization’s legal exposure in light of employee claims of wrongdoing, the exit agreement is meant to provide longtime leaders with a fair and appropriate reward for service, typically in the following circumstances:
- Catch-up — a longtime leader has worked at below market-level salary and/or received little to no retirement benefit and can’t afford to leave, even when ready, so must make up for lost time in savings.
- Incentive to stay longer – the board needs the valued leader to remain in her/his role for a specific period of time, presumably to see something to fruition.
- Post-retirement (departure) services – the departing leader is contracted to provide ongoing, clearly-defined services which she/he is uniquely qualified to offer.
- Honorific — the board aims to ensure “healthy closure to the CEO’s productive tenure” by providing a monetary gift as resources allow.
Given the nonprofit board’s expectation to pay for specific services upon delivery, the honorific exit agreement is arguably the most abstract offering to consider. In the nonprofit sector, though, it can be especially effective in allowing a leader to exit in a graceful, timely manner — and not hold on longer than mutually beneficial. Financial stress keeps many in jobs they’ve outgrow, as few can afford a gap in personal income and finding a new job or opportunity takes time – and attention. By removing the weight of the financial burden of transition, the board ensures a leader can remain focused on the current role, organization, and transition plan until it is appropriately executed. Then she/he can freely develop new opportunities without compromising the progress or mission of the organization.
Surely all boards would want to offer their valued leaders generosity upon appropriately designed and executed departures, but nonprofits face powerful realities that often dictate their approaches. Nonprofit Quarterly identifies the following key considerations in developing exit agreements:
- Financial capacity — the exit agreement must be designed to mitigate any changes in the organization’s financial status (ie. an escape clause or a one-time payment).
- Private inurement risk – “private inurement” (the illegal transfer of the charitable organization’s assets to an insiders or those who have significant influence over the organization) could jeopardize tax exempt status, so any executive compensation must not be deemed beyond what’s “reasonable” in keeping with relevant compensation data.
- Stakeholder dismay – the board be prepared to disclose and justify its expenditure of resources.
- Contract considerations – the board must craft the agreement to avoid any potential breach of contract allegations by the outgoing leader.
- Disclosure to the incoming CEO – while the terms of the exit agreement should be negotiated before a new CEO steps in, the latter eventually will have access to the contract and likely develop similar expectations unless a unique rationale is presented from the start.
- Internal equity – an out-of-character agreement can raise concerns about equity and sabotage morale in an organization, so boards must consider the intended and potential impact of the exit contract.
Given ongoing changes in the nonprofit sector – from increased demand, regulation, and scrutiny to decreased funding and human capital resources – it is essential for boards and executive leaders to remain at the top of their games in their shared and individual roles. It serves both parties well to eliminate the unnecessary strain of trying to make the “marriage” work when it’s no longer necessary or even appropriate. To ensure timely and amicable separations, executive exit agreements can be useful tools for nonprofit boards that otherwise lack the resources, capacity, and luxury of predicting and planning for effective executive succession in a way that honors the needs of both organizations and incumbent leaders.