Compensating the CEO—It’s About More than Money

Getting the compensation-setting process right must be a priority.

 

by Dan Busby and John Pearson

 

When CEO compensation-setting is given an appropriate priority,
a ministry board has demonstrated leadership
in a significant element of governance.
We had gotten into a deep rut.
 

 

Anthony has been the ministry’s CEO for 15 years. Finances have been tight over this time period. The board has reviewed and adjusted his compensation package about every three years. Even then, the adjustments only amounted to cost-of-living increases.

While there is some unrest on the board about Anthony’s performance, it has been five or six years since his last performance review by the board. Since performance reviews and compensation reviews go hand in hand, it is past time for the board to step up to its responsibilities.

Reviewing and setting the CEO’s compensation may be one of the board’s least favorite things to do. It requires communi­cation with the CEO on a very sensitive topic. It requires obtaining appropriate comparative data. It may require an “out-of-body” experience for most boards—especially if finances are tight.

Boards would rather approve new programs, review the annual audit, adopt new policies—anything but set the CEO’s compensation.

Board members from the business world understand the compensation-setting process in that sphere. Leaders of other ministries know how compensation is set in their world. But the compensation-setting responsibilities for your board are often different from other experiences.

There are so many questions for which there are often unclear answers. Here are ten questions many boards ask:

  1. How often should the board obtain compensation comparability data?
  2. What is the best source of comparability data?
  3. How often should a compensation consultant be used?
  4. What types of fringe benefits are appropriate?
  5. How much should be allocated to each of the fringe benefit categories?
  6. Should there be a compensation framework that considers the relationship between the CEO’s pay and the lowest paid position in the ministry?
  7. How does founder status or a long versus short tenure figure into compensation planning?
  8. What if this is a startup ministry with very limited resources?
  9. Should the CEO play any part in the compensation-setting process?
  10. Should the compensation increase for the CEO relate to how the ministry is doing financially?

While all of these questions cannot be answered here, there are six principles that boards should consider:

  1. Ensure that the CEO’s compensation is reasonable. The definition of unreasonable compensation is quite illusory. Since compensation is rarely excessive, ministries should more keenly focus on the compensation approval process more than on unreasonable compensation.
  2. Annually review all elements of the CEO’s compensation. Too often, the board focuses on base salary to the exclusion of fringe benefits. All elements of compensation should be considered, including fringe benefits—(taxable, non-taxable, or tax-deferred) such as health insurance and retirement.
  3. Limit the CEO’s role in the process. It is a good plan for the board to discuss the adequacy of compensation with the CEO. Beyond that, the CEO should not participate in the compensation-setting process.
  4. Be informed about the compensation of family members. While the board would rarely approve the compensation of ministry-paid members of the CEO’s family, the board should be aware of those compensation packages.
  5. Use comparability data. In some instances, compensation data is not readily available. However, with research, some comparability data can be determined.
  6. Approve the compensation. Various processes are used to arrive at the compensation level. Here are the key options:
  • Board as a whole. For a small ministry with only a few board members, it may make sense for the entire board to handle the compensation-setting process.
  • Board committee. A committee of the board may do the initial work on the compensation-setting process with final approval by the full board. This may be the executive committee or another committee.

The compensation package may be recommended by a board committee, but the ultimate decision on the package should generally be made by the full governing board.

CEOs, and the constituents of ministries, will deeply appreciate boards that address compensation-setting with integrity and thoroughness. Ministries that do not compen­sate their CEO adequately will be guilty of underpaying their current CEO and will have to play catch-up when setting the compensation of their next CEO.

As your board engages in the compensation-setting process, other resources you may find helpful include:

 

BOARDROOM LESSON
_______________________________

When a board focuses primarily on the cash compensation paid to the CEO,
it can easily overlook an equally important element—
the process by which compensation is set.

  Board Action Steps:

  1. Review: Annually review the CEO’s compensation and fringe benefits package.

  2. Compare: Obtain periodic comparability data to ensure that compensation is reasonable.

  3. Document: Approve all elements of the compensation package with the CEO recused and contempora­neously document the board’s decision.

 

Prayer

Lord, we pray for the wisdom to give adequate attention
to the CEO compensation-setting process. Amen.

 

From More Lessons From the Nonprofit Boardroom: Effectiveness, Excellence, Elephants!, 2019, www.ECFA.org/KnowledgeCenter.


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

Navigation