Episode 5 - Nonprofit Cash compensation beyond salary – the bonus
We have already discussed what happens when a contract ends (episode 1), how long it extends (episode 2) and what should be included besides the cash (episode3). Episode 4 covered salary.
In this episode, we shall cover the topic of nonprofit executive bonuses – what they are, the best methods for developing and implementing a bonus, and additional uses of the bonus as a retention tool.
Over the last 40 years, nonprofit organizations have become much more sophisticated in their approach to sustainability and desire for impact. One area that receives less attention is nurturing, retaining, and planning for leadership succession. And one tangible way in which leaders can be encouraged and retained is through a formal evaluation process, feedback, and rewards for their efforts.
Nonprofit boards often ask how common it is to offer our CEO and senior management a bonus. First, it's become common – executive bonuses that were an exception ten years ago are now commonplace. Of the executive contracts that I negotiate, it is rare when there is no bonus component; and the bonus is advantageous to both the CEO and the board.
Bonus tied to the strategic plan
Bonus criteria tie strategy to behavior and action. Ideally, the compensation committee and the CEO, by contract, will agree on a specific time at the beginning of the year to agree on a set of bonus criteria that are tied to both short-term and long-term strategic objectives: meeting the budget goals, increasing earned income, filling staff vacancies – measurable, annual objectives; and, longer-term strategic objectives – building the brand, diversifying the board, creating a new business, for example. The best bonus schemes are also quantitative, so criteria are assigned percentages. For instance, if achieved, each short-term objective can contribute 2% toward a bonus, and the longer-term, less quantifiable goals, perhaps, are assigned another 5%. The typical CEO bonus is between 15% and 25% of the salary. While there is usually some discretion on the part of the board committee, this process helps with the evaluation. The most important part of the process is at the back end, when, again, according to the contract, the board and the CEO meet on a date certain to review, assess, communicate, and agree on an annual evaluation. The best employment contracts specify these dates.
Take note that tying a bonus simply to the amount of money raised, for many reasons, is not a great idea. And, a bonus awarded "at the discretion of the board" defeats the purpose and value of the process. Also, the employment contract must mention that the CEO may receive a bonus the amounts (even if it is vague, like "the board may award an additional bonus for extraordinary performance" because, if it's not mentioned, it borders on the illegal.
Staff bonuses
Once a CEO bonus plan is established, the next step is to roll out a similar program for the senior executive team. Using the same method, the CEO and senior executives agree on criteria and then revisit those criteria at the end of the year, awarding a bonus based on the achievement of goals. Senior executive bonuses are usually in the 5% to 15% range.
The Retention Bonus
We have entered the age of the "great resignation." Staff departures and unfilled vacancies are commonplace. The success of a capital campaign, building project, or planning and creating a new business venture requires continuity at the CEO and the senior executive level. But how to guarantee that the CEO and key staff will remain employed through the process. And while compensation is not the #1 reason why employees leave or stay in an organization (the #1 reason employees quit is because of an unpleasant or ineffective supervisor or board), the promise of a reward for remaining employed through a particular date is a motivating factor.
Retention bonuses are nicknamed "golden handcuffs," essentially a valuable gift to retain an employee in the corporate world. For the CEO, this often takes the form of a SERP (supplemental executive retirement plan), and for nonprofit organizations, it is technically a 457 (f). Simply stated, a CEO would receive a significant financial reward that accrues tax-free if they agree to remain employed by the organization through a date certain (say, five years hence.). While the details and tax implications are much more complicated, the premise is simple – if you stay for a period of time, you receive a large sum of cash – if you leave before then, you lose it all. For highly paid executives trying to save for retirement, this serves their purposes, and it is an added attraction to remain employed with the organization.
My CEO clients, who personally enjoy these plans, are now adopting them for senior staff. A typical retention agreement (for staff that might not have a formal employment contract) simply states that if you remain employed by our organization through the next three years, you will receive a bonus equal to x% of your current salary. Beyond the cash, it is anexpressionof personal and professional interest by the CEO and the organization to the staff person that 1) we want you to stay and 2) it's important enough that we are willing to pay you to stay. The retention bonus is also an excellent part of succession planning. While planning for the retirement of a CEO, the board would want to retain the senior executive team during the search and for perhaps a year after the new CEO begins employment. A staff retention bonus does not prevent the new CEO from making organizational changes; if the employee is fired, they would still receive the compensation (only if they quit voluntarily would they forfeit the bonus).
