Most professionals think hard about getting a job. Choosing the right outfit. Acing the interview. Negotiating a fair salary and benefits package. But rarely is much thought given to leaving a job until that day draws near. That can cause a wave of trouble for a not-for-profit organization, especially when the founder or long-time executive is ready to walk out the door one last time. Boards and executives who take a proactive approach to saying adiós can ease the transition to new leadership and help ensure stability in their organizations.
About Exit Agreements
Large exit packages paid to outgoing CEOs often make headlines and draw ire from stakeholders and the public at large. But such a package may be perfectly appropriate as financial acknowledgement that a key executive skillfully led the organization for many years. For some executives, particularly those in not-for-profits, the exit package may serve to make up for years of accepting compensation at less-than-market rates.
So when is an exit agreement, frequently characterized as a “golden parachute,” appropriate for a not-for-profit executive? And what type of agreement should be used?
According to Nonprofit Quarterly, “Too many transitions become strained because of lack of attention to what comprises a good ending for an executive— particularly a founder or long-tenured leader.” In other words, proper planning – well in advance of an executive’s potential departure – is in order, and choosing the most appropriate type of agreement is vital.
There are four general types of agreements and they are most common in the following circumstances:
A long-tenured executive or founder on the cusp of retirement has accepted a below-market salary for many years or has received minimal or no retirement benefits. As a result, the organization intends to play catch-up with a sizable monetary package designed to correct these inequalities upon the executive’s exit.
According to Daring to Lead 2011, a national study of not-for-profit executive leadership conducted by CompassPoint Nonprofit Services and the Meyer Foundation, nine percent of executives said they delayed their exits because of reduced funding and the financial instability within their organizations – meaning their not-for-profits couldn’t provide an adequate catch-up package. This was a major concern for many executives, especially the 22 percent of retiring executives age 60 and older who felt forced to delay their departure due to a loss in their retirement savings.
The board wants to motivate a valued executive to delay his or her exit for a defined period of time for purposes important to the organization – for example, to allow the executive to oversee a significant capital campaign or to head the organization until a suitable successor can be found.
According to the Daring to Lead survey, nine percent of executives who planned to leave their positions delayed their departures due to “the perceived lack of qualified successor.” Only 17 percent of surveyed organizations had a documented succession plan, and only 33 percent of executives said they thought their boards would hire the right successor when they left.
The board wants the departing executive to continue to provide guidance and consultation after leaving his or her position – for example, to help the not-for-profit transition to a new leader. The outgoing executive would receive payment during this extended, post-retirement period. This agreement also is appropriate for an executive who wants to remain active with the organization in a reduced, carefully defined capacity after retirement. It is basically a simple pay-for-service consulting contract that spells out the former CEO’s involvement in any organizational activities and defines his or her availability to help on an as-needed basis.
The board approves a monetary gift to recognize an executive’s long and successful tenure. This type of agreement does not involve making up for inadequate retirement savings or playing catch-up for insufficient salary over the years, but instead is established simply to reward the CEO for years of service.
Regardless of the type of exit agreement, there always exist stumbling blocks, including reactions from internal (staff and volunteers) or external (benefactors, regulators, the public) stakeholders and the IRS (especially if the executive receives a large, lump-sum payment). To head off any conflict, make all parties aware that the terms of the exit agreement will be made public to all stakeholder groups, which can be achieved through the required IRS Form 990 as well as through other internal communications.
Keeping Executives Happy
Thanks to the "Great Recession,” many not-for-profit executives feel stressed out. According to the Daring to Lead survey, 84 percent of leaders said they and their organizations were negatively affected by the recession. Further, many felt overwhelmed with anxiety. The path from burned-out to out-the-door is but mere steps apart, so organizations need to find ways to keep their reigning executives happy, while simultaneously planning succession. The use of exit agreements is one way an organization can be proactive in this area.
Another way to keep executives satisfied: compensation. Much has been written about compensation for not-for-profit executives and the balancing act between focus on the organization’s charitable mission and consideration for the market-driven rate for comparable executives at both not-for-profit and commercial enterprises.
While a detailed discussion of not-for-profit compensation is beyond the scope of this article, you can read more on the subject by clicking here. Regardless of what they are paid, executives should receive compensation packages that provide compelling incentives to run their organizations most effectively, encourage long-term thinking, and discourage potentially destructive risk-taking.
If you have any questions or comments regarding exit agreements, please contact us here.
Priya Kapila is a Senioar Manager in the Compensation Consulting Practice at CBIZ Human Capital Services in the St. Louis office of CBIZ MHM. She can be reached at 314.692.2249 or email@example.com.
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