Unexpected leadership vacancies affect every industry, but with not-for-profits they can be particularly burdensome because they may highlight an organization’s budgetary restrictions, weaknesses in its compensation strategy and larger questions about its retention ability.
Recently we helped a client with a situation that illustrates how important it is to be confident in your leadership pipeline. A fast-growing healthcare-related not-for-profit lost its long-time chief executive officer (CEO) to an unexpected early retirement. No successor had been identified, and the not-for-profit turned to an outside search.
The organization whittled down its search to three finalists, two of which came from the for-profit sector. When the not-for-profit inquired into the candidates’ expectations for compensation, the responses produced some sticker shock with the Board of Directors. The organization then had to scramble not only to determine if the salary expectations were reasonable but also convince its Board of Directors and the public, that the next generation of leadership would be worth the expense.
If the organization had taken steps earlier to consider retention, employee development and compensation strategy, it may have had an easier time filling its former CEO’s role.
Begin with Recruitment
Finding the right fit for the leadership of your organization takes time, and it can be made more complicated when your organization doesn’t have a budget in place. The 2016 Nonprofit Employment Practices Survey found 91 percent of small not-for-profits, 64 percent of medium-sized organizations and 59 percent of large not-for-profits did not have a recruitment budget.
A creative strategy can help work around resource limitations. Not-for-profits can build and maintain the talent pipeline within their organization. They can also think ahead about where positions may open up and recruit top performers from competitors and vet referrals from partners, board members and other staff members. Social media and online job sites may also help pinpoint the next generation of leadership, with minimal investment from your organization.
If an organization is in a crunch like the healthcare-related not-for-profit referenced above, search firms can also provide assistance when it comes to key positions. Outside parties that specialize in the search process can identify strong candidates quickly and outsource the recruitment process to free up more internal resources.
Don’t Lose Track of Retention
Nearly 75 percent of employees are considering whether they should take another job. Losing an employee can be costly; a common estimate puts the cost of replacing a staff member at 33 to 150 percent of the position’s annual salary.
Employees who feel engaged with their workplace are less likely to seek other opportunities. Engagement can be driven by caring, competent and likable senior leaders, effective managers, effective teamwork at all levels, job enrichment and professional growth, value for employee contributions and concern for employee well-being—most of which can be accomplished without a retention budget. Title enhancement, flexible scheduling and telecommuting are common employee-engagement tactics your organization could consider.
If you have the budget, short-term tangibles such as increase in base pay, bonuses or health benefits, and long-term tangibles such as retirement, deferred compensation and job security also help drive engagement.
One of the best methods for keeping staff comes from compensation. Operating without a compensation strategy in place can make filling even routine positions much more complicated, as the healthcare organization discovered.
For one, 501(c)(3) and 501(c)(4) organizations must be able to demonstrate that they compensate “disqualified persons" (e.g., President, CEO, COO, top financial person) at fair market value. Compensation, for purposes of the requirement, includes base salary, annual and long-term incentives, benefits and perquisites.
Compensation that exceeds fair market value is considered to be an excess benefit transaction and may be subject to a two-tiered excise tax. Disqualified persons may owe a 25 percent penalty on the excess compensation they receive, which can be increased to as much as 200 percent if it’s not corrected. Organizational managers (e.g., officers, directors, trustees) responsible for determining and/or authorizing the compensation face a 10 percent penalty that is capped at $20,000 per excess benefit transaction.
Not-for-profits subject to the IRS requirements for compensation can mitigate their risk of penalty if they follow these rebuttable presumption procedures:
- The compensation arrangement is approved in advance by an independent authorized body without conflicts of interest (e.g., board of directors or trustees)
- The authorized body obtained and relied upon appropriate data prior to making the determination (e.g., compensation consultant’s data)
- The authorized body concurrently and adequately documented the basis for making determination of compensation
A formal strategy also helps with linking compensation actually paid to donor expectations and perceptions about what executives at your organization should be paid. With a strategy in place that includes comparable compensation data, you may be more successful in reassuring donors and other interested parties that appropriate steps were taken to ensure pay was reasonable and competitive in the marketplace.
The same concept could be said for members of your board. If the healthcare organization had regularly conducted compensation studies, its board may not have been as surprised by the applicants’ expected pay amounts.
Building Your Protection Plan
Proactively creating a strategy is essential for protecting your organization from experiencing a leadership vacuum. As you consider ways to enhance your retention and compensation efforts, be sure to include members of your human resources department as part of the conversation. Particularly with compensation strategies, you may also want to include members of your legal counsel and your board in some of the discussions.
For more information about what not-for-profits can do to recruit and retain talent, please contact us
Hal Wallach leads the CBIZ Human Capital Services Executive Compensation Consulting practice and can be reached email@example.com or 314.692.5819.
Angie Salmon is the senior vice president of EFL Associates, CBIZ’s executive search division. She can be reached at firstname.lastname@example.org or 816.945.5403.